e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended April 1, 2011
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
Commission file number
001-15885
MATERION CORPORATION
(Exact name of Registrant as
specified in charter)
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Ohio
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34-1919973
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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6070 Parkland Blvd., Mayfield Hts., Ohio
(Address of principal executive
offices)
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44124
(Zip Code)
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Registrants
telephone number, including area code:
216-486-4200
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 o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
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 and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definition of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of April 25, 2011 there were 20,406,929 common shares,
no par value, outstanding.
PART I
FINANCIAL INFORMATION
MATERION
CORPORATION AND SUBSIDIARIES
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Item 1.
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Financial
Statements
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The consolidated financial statements of Materion Corporation
and its subsidiaries for the first quarter ended April 1,
2011 are as follows:
1
Consolidated
Statements of Income
(Unaudited)
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First Quarter Ended
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Apr. 1,
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Apr. 2,
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(Thousands, except per share amounts)
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2011
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2010
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Net sales
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$
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374,805
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$
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295,082
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Cost of sales
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319,005
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245,768
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Gross margin
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55,800
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49,314
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Selling, general and administrative expense
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31,642
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30,340
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Research and development expense
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2,410
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1,685
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Other-net
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3,671
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4,084
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Operating profit
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18,077
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13,205
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Interest expense net
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585
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619
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Income before income taxes
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17,492
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12,586
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Income tax expense
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5,674
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5,865
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Net income
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$
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11,818
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$
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6,721
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Net income per share of common stock basic
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$
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0.58
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$
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0.33
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Weighted-average number of common shares outstanding
basic
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20,356
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20,257
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Net income per share of common stock diluted
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$
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0.57
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$
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0.33
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Weighted-average number of common shares outstanding
diluted
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20,796
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20,467
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See Notes to Consolidated Financial Statements.
2
Consolidated
Balance Sheets
(Unaudited)
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Apr. 1,
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Dec. 31,
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(Dollars in thousands)
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2011
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2010
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Assets
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Current assets
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Cash and cash equivalents
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$
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12,007
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$
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16,104
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Accounts receivable
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153,404
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139,374
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Other receivables
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3,030
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3,972
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Inventories
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176,378
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154,467
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Prepaid expenses
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33,241
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31,743
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Deferred income taxes
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10,035
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10,065
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Total current assets
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388,095
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355,725
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Related-party notes receivable
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90
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90
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Long-term deferred income taxes
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2,042
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2,042
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Property, plant and equipment
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724,188
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719,953
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Less allowances for depreciation, amortization and depletion
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(464,560
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)
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(454,085
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)
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Property, plant and equipment net
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259,628
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265,868
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Intangible assets
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35,213
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36,849
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Other assets
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1,839
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1,900
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Goodwill
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72,936
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72,936
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Total Assets
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$
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759,843
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$
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735,410
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Liabilities and Shareholders Equity
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Current liabilities
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Short-term debt
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$
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56,395
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$
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47,835
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Accounts payable
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36,121
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33,375
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Other liabilities and accrued items
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45,572
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59,851
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Unearned revenue
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3,029
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2,378
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Income taxes
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5,940
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3,921
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Total current liabilities
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147,057
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147,360
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Other long-term liabilities
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17,883
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17,915
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Retirement and post-employment benefits
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82,032
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82,502
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Unearned income
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58,267
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57,154
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Long-term income taxes
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2,905
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2,906
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Deferred income taxes
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4,166
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4,912
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Long-term debt
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48,305
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38,305
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Shareholders equity
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399,228
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384,356
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Total Liabilities and Shareholders Equity
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$
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759,843
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$
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735,410
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See Notes to Consolidated Financial Statements.
3
Consolidated
Statements of Cash Flows
(Unaudited)
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Three Months Ended
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Apr. 1,
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Apr. 2,
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(Dollars in thousands)
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2011
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2010
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Net income
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$
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11,818
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$
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6,721
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Adjustments to reconcile net income to net cash
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used in operating activities:
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Depreciation, depletion and amortization
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8,894
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8,521
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Amortization of mine costs
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2,999
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Amortization of deferred financing costs in interest expense
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117
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153
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Derivative financial instrument ineffectiveness
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489
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Stock-based compensation expense
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990
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|
950
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Changes in assets and liabilities net of acquired assets
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and liabilities:
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Decrease (increase) in accounts receivable
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(13,094
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)
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(26,311
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)
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Decrease (increase) in other receivables
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|
942
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5,757
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Decrease (increase) in inventory
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(21,198
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)
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(10,084
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)
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Decrease (increase) in prepaid and other current assets
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(1,280
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)
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2,607
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Increase (decrease) in accounts payable and accrued expenses
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(12,004
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)
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(896
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)
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Increase (decrease) in unearned revenue
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|
651
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|
174
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Increase (decrease) in interest and taxes payable
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2,054
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(935
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)
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Increase (decrease) in long-term liabilities
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|
(1,623
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)
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(2,754
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)
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Other net
|
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|
(20
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)
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(162
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)
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Net cash used in operating activities
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|
(20,754
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)
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(15,770
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)
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Cash flows from investing activities:
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Payments for purchase of property, plant and equipment
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(3,869
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)
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(13,349
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)
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Payments for mine development
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(127
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)
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|
(2,477
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)
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Reimbursements for capital equipment under government contracts
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1,112
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5,360
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Payments for purchase of business net of cash received
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|
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|
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(22,332
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)
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Proceeds from transfer of acquired inventory to consignment line
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3,333
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Proceeds from sale of property, plant and equipment
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|
31
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76
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|
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Net cash used in investing activities
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|
|
(2,853
|
)
|
|
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(29,389
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)
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Cash flows from financing activities:
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|
|
|
|
|
|
|
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Proceeds from issuance (repayment) of short-term debt
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|
8,561
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|
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|
(5,697
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)
|
Proceeds from issuance of long-term debt
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|
20,000
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|
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|
50,000
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|
Repayment of long-term debt
|
|
|
(10,000
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)
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|
|
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Principal payments under capital lease obligations
|
|
|
(257
|
)
|
|
|
(55
|
)
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Issuance of common stock under stock option plans
|
|
|
637
|
|
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|
27
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|
Tax benefit from stock compensation realization
|
|
|
376
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|
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|
2
|
|
|
|
|
|
|
|
|
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Net cash provided from financing activities
|
|
|
19,317
|
|
|
|
44,277
|
|
Effects of exchange rate changes
|
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|
193
|
|
|
|
(254
|
)
|
|
|
|
|
|
|
|
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|
Net change in cash and cash equivalents
|
|
|
(4,097
|
)
|
|
|
(1,136
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
16,104
|
|
|
|
12,253
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
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|
$
|
12,007
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|
|
$
|
11,117
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|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
Notes to
Consolidated Financial Statements
(Unaudited)
|
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Note A
|
Accounting
Policies
|
In managements opinion, the accompanying consolidated
financial statements contain all adjustments necessary to
present fairly the financial position as of April 1, 2011
and December 31, 2010 and the results of operations for the
three month periods ended April 1, 2011 and April 2,
2010. All adjustments were of a normal and recurring nature.
Certain amounts in prior years have been reclassified to conform
to the 2011 consolidated financial statement presentation.
Inventories on the Consolidated Balance Sheets are summarized as
follows:
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Apr. 1,
|
|
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Dec. 31,
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(Thousands)
|
|
2011
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2010
|
|
|
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|
Principally average cost:
|
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|
|
|
|
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|
Raw materials and supplies
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|
$
|
50,595
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|
$
|
43,295
|
|
Work in process
|
|
|
154,788
|
|
|
|
159,081
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|
Finished goods
|
|
|
57,021
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|
|
|
32,991
|
|
|
|
|
|
|
|
|
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|
Gross inventories
|
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|
262,404
|
|
|
|
235,367
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|
Excess of average cost over LIFO inventory value
|
|
|
86,026
|
|
|
|
80,900
|
|
|
|
|
|
|
|
|
|
|
Net inventories
|
|
$
|
176,378
|
|
|
$
|
154,467
|
|
|
|
|
|
|
|
|
|
|
|
|
Note C
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Pensions
and Other Post-retirement Benefits
|
The following is a summary of the first quarter 2011 and
2010 net periodic benefit cost for the domestic defined
benefit pension plan and the domestic retiree medical plan.
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|
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|
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|
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|
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Pension Benefits
|
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Other Benefits
|
|
|
|
First Quarter Ended
|
|
|
First Quarter Ended
|
|
|
|
Apr. 1,
|
|
|
Apr. 2,
|
|
|
Apr. 1,
|
|
|
Apr. 2,
|
|
(Dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,516
|
|
|
$
|
1,244
|
|
|
$
|
71
|
|
|
$
|
68
|
|
Interest cost
|
|
|
2,309
|
|
|
|
2,156
|
|
|
|
399
|
|
|
|
435
|
|
Expected return on plan assets
|
|
|
(2,685
|
)
|
|
|
(2,536
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(118
|
)
|
|
|
(132
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Amortization of net loss
|
|
|
982
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,004
|
|
|
$
|
1,443
|
|
|
$
|
461
|
|
|
$
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made contributions to the domestic defined benefit
pension plan of $1.8 million in the first quarter of 2011.
Materion Brush Inc. (formerly known as Brush Wellman Inc.), one
of the Companys wholly owned subsidiaries, is a defendant
from time to time in legal proceedings where the plaintiffs
allege they have contracted chronic beryllium disease (CBD) or
related ailments as a result of exposure to beryllium. Two CBD
cases were outstanding as of December 31, 2010. During the
first quarter 2011, one case was dismissed while a settlement
agreement was reached in the other case for an amount less than
$0.1 million (although the case was not dismissed until
early in the second quarter 2011). There were no new CBD cases
filed during the first quarter 2011.
5
The Company will record a reserve for CBD or other litigation
when a loss from either settlement or verdict is probable and
estimable. Claims filed by third-party plaintiffs where the
alleged exposure occurred prior to December 31,
2007 may be covered by insurance subject to an annual
deductible of $1.0 million. Reserves are recorded for
asserted claims only and defense costs are expensed as incurred.
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 Companys 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 $5.1 million as of
April 1, 2011 and $5.2 million as of December 31,
2010. Environmental projects tend to be long-term and the final
actual remediation costs may differ from the amounts currently
recorded.
|
|
Note E
|
Comprehensive Income
|
The reconciliation between net income and comprehensive income
for the three month period ended April 1, 2011 and
April 2, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
Apr. 1,
|
|
|
Apr. 2,
|
|
(Dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
Net income
|
|
$
|
11,818
|
|
|
$
|
6,721
|
|
Cumulative translation adjustment
|
|
|
1,311
|
|
|
|
(906
|
)
|
Change in the fair value of derivative
|
|
|
|
|
|
|
|
|
financial instruments, net of tax
|
|
|
(200
|
)
|
|
|
531
|
|
Pension and other retirement plan
|
|
|
|
|
|
|
|
|
liability adjustments, net of tax
|
|
|
560
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
13,489
|
|
|
$
|
6,722
|
|
|
|
|
|
|
|
|
|
|
|
|
Note F
|
Segment
Reporting
|
In the fourth quarter 2010, the names of the Companys four
reportable segments were changed. Advanced Material Technologies
and Services has become Advanced Material Technologies,
Specialty Engineered Alloys was revised to Performance Alloys,
Beryllium and Beryllium Composites was shortened to Beryllium
and Composites and Engineered Material Systems was changed to
Technical Materials. These changes only affected the segment
names as the segments make up, reporting structures and
how they are evaluated remained unchanged from previous periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material
|
|
|
Performance
|
|
|
Beryllium and
|
|
|
Technical
|
|
|
|
|
|
All
|
|
|
|
|
(Dollars in thousands)
|
|
Technologies
|
|
|
Alloys
|
|
|
Composites
|
|
|
Materials
|
|
|
Subtotal
|
|
|
Other
|
|
|
Total
|
|
|
|
|
First Quarter 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
256,626
|
|
|
$
|
84,449
|
|
|
$
|
13,958
|
|
|
$
|
19,661
|
|
|
$
|
374,694
|
|
|
$
|
111
|
|
|
$
|
374,805
|
|
Intersegment sales
|
|
|
681
|
|
|
|
910
|
|
|
|
190
|
|
|
|
318
|
|
|
|
2,099
|
|
|
|
|
|
|
|
2,099
|
|
Operating profit (loss)
|
|
|
10,709
|
|
|
|
8,765
|
|
|
|
86
|
|
|
|
2,157
|
|
|
|
21,717
|
|
|
|
(3,640
|
)
|
|
|
18,077
|
|
Assets
|
|
|
336,190
|
|
|
|
245,569
|
|
|
|
122,154
|
|
|
|
25,651
|
|
|
|
729,564
|
|
|
|
30,279
|
|
|
|
759,843
|
|
First Quarter 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
203,010
|
|
|
$
|
63,388
|
|
|
$
|
13,095
|
|
|
$
|
15,462
|
|
|
$
|
294,955
|
|
|
$
|
127
|
|
|
$
|
295,082
|
|
Intersegment sales
|
|
|
394
|
|
|
|
3,749
|
|
|
|
33
|
|
|
|
392
|
|
|
|
4,568
|
|
|
|
|
|
|
|
4,568
|
|
Operating profit (loss)
|
|
|
8,464
|
|
|
|
3,328
|
|
|
|
2,157
|
|
|
|
1,041
|
|
|
|
14,990
|
|
|
|
(1,785
|
)
|
|
|
13,205
|
|
Assets
|
|
|
314,864
|
|
|
|
205,555
|
|
|
|
91,947
|
|
|
|
23,049
|
|
|
|
635,415
|
|
|
|
42,428
|
|
|
|
677,843
|
|
|
|
Note G
|
Stock-based
Compensation Expense
|
Stock-based compensation expense was $1.0 million in the
first quarter 2011 and 2010.
6
The Company received $0.6 million for the exercise of
approximately 49,000 options during the first quarter 2011.
Approximately 7,000 stock appreciation rights were exercised in
the first quarter as well.
Other-net
expense for the first quarter of 2011 and 2010 is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
Apr. 1,
|
|
|
Apr. 2,
|
|
(Dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
Foreign currency exchange/translation loss
|
|
$
|
(344
|
)
|
|
$
|
(553
|
)
|
Amortization of intangible assets
|
|
|
(1,509
|
)
|
|
|
(1,485
|
)
|
Metal consignment fees
|
|
|
(2,129
|
)
|
|
|
(1,174
|
)
|
Derivative ineffectiveness
|
|
|
|
|
|
|
(489
|
)
|
Other items
|
|
|
311
|
|
|
|
(383
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,671
|
)
|
|
$
|
(4,084
|
)
|
|
|
|
|
|
|
|
|
|
The tax expense of $5.7 million in the first quarter 2011
was calculated by applying a rate of 32.4% against income before
income taxes, while the tax expense of $5.9 million in the
first quarter 2010 was calculated by applying a rate of 46.6%
against the income before income taxes in that period. The
differences between the statutory and effective rates in both
quarters was due to the impact of percentage depletion, foreign
source income and deductions, the production deduction,
executive compensation, state and local taxes and other factors.
In addition, the tax expense in the first quarter 2010 included
a discrete item of $1.4 million for the reduction in a
deferred tax asset. The asset was reduced as a result of the
Patient Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act. This legislation
eliminates the income tax deduction related to prescription drug
benefits provided to retirees and reimbursed under the Medicare
Part D retiree drug subsidy program beginning in 2013.
There were no material discrete events that affected the tax
rate in the first quarter 2011.
|
|
Note J
|
Fair
Value of Financial Instruments
|
The Company measures and records financial instruments at their
fair values. A fair value hierarchy is used for those
instruments measured at fair value that distinguishes between
assumptions based on market data (observable inputs) and the
Companys 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.
7
The following table summarizes the financial instruments
measured at fair value in the Consolidated Balance Sheet as of
April 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(Dollars in thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors deferred compensation investments
|
|
$
|
680
|
|
|
$
|
680
|
|
|
$
|
|
|
|
$
|
|
|
Foreign currency forward contracts
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
687
|
|
|
$
|
680
|
|
|
$
|
7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors deferred compensation liability
|
|
$
|
680
|
|
|
$
|
680
|
|
|
$
|
|
|
|
$
|
|
|
Foreign currency forward contracts
|
|
|
1,851
|
|
|
|
|
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,531
|
|
|
$
|
680
|
|
|
$
|
1,851
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses a market approach to value the assets and
liabilities for outstanding derivative contracts in the table
above. Foreign currency forward contracts are valued through
models that utilize market observable inputs including both spot
and forward prices for the same underlying currencies. The
carrying values of the other working capital items and debt on
the Consolidated Balance Sheet approximate their fair values as
of April 1, 2011.
|
|
Note K
|
Derivative
Instruments and Hedging Activity
|
The Company uses derivative contracts to hedge portions of its
foreign currency exposures. The objectives and strategies for
using foreign currency derivatives are as follows:
The Company sells products to overseas customers in their local
currencies, primarily the euro and yen. The Company uses 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 dollar
value of the 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 contract 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 they 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 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 that exposure within the confines of the policy.
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. Hedge contracts are typically layered in at
different times for a specified exposure period in order to
minimize the impact of rate movements.
8
The Company may also use forward contracts to hedge its precious
metal exposures. The Company maintains the majority of its
precious metals used in production on a consignment basis. The
metal is purchased out of consignment when it is shipped to the
customer and the purchase price forms the basis for the price to
be charged to the customer. This allows for changes in the
market prices of the precious metals in either direction to be
passed through to the customer and reduces the impact changes in
prices could have on the Companys margins and operating
profit. However, in certain circumstances, the Company may elect
to purchase precious metals to meet a portion of its production
requirements. The Company may then hedge the price exposure on
this inventory by securing a forward contract. The gain or loss
on the forward contract from movements in the market price will
generally offset the gain or loss on the disposition of the
metal. The use of precious metal derivative contracts is also
governed by policies approved by the Board of Directors and
monitored by a group of senior financial managers.
The Company will only enter into a derivative contract if there
is an underlying identified exposure. Contracts are typically
held until maturity. The Company does not engage in derivative
trading activities and does not use derivatives for speculative
purposes. The Company only uses currency hedge contracts that
are denominated in the same currency as the underlying exposure.
All derivatives are recorded on the balance sheet at their fair
values. 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
derivatives 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 outstanding foreign currency forward contracts had a
notional value of $36.6 million as of April 1, 2011.
All of these contracts were designated as and effective as cash
flow hedges. There was no ineffectiveness associated with the
outstanding currency contracts. The fair value of these
contracts was recorded on the balance sheet as of April 1,
2011 as follows (dollars in thousands):
|
|
|
|
|
|
|
Fair
|
|
(Asset/liability)
|
|
Value
|
|
|
|
|
Other assets
|
|
$
|
7
|
|
Other liabilities and accrued items
|
|
|
(1,770
|
)
|
Other long-term liabilities
|
|
|
(81
|
)
|
|
|
|
|
|
Total
|
|
$
|
(1,844
|
)
|
|
|
|
|
|
9
A summary of the hedging relationships of the outstanding
derivative financial instruments designated as cash flow hedges
as of April 1, 2011 and April 2, 2010 and the amounts
transferred into income for the three month periods then ended
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Apr. 1,
|
|
|
Apr. 2,
|
|
(Dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
Derivative in cash flow hedging relationship
|
|
|
Foreign Currency
|
|
|
|
Foreign Currency
|
|
|
|
|
Forward Contracts
|
|
|
|
Forward Contracts
|
|
Effective portion of hedge:
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in OCI at the end of the period
|
|
$
|
(1,844
|
)
|
|
$
|
932
|
|
Location of gain (loss) reclassified from OCI into income
|
|
|
Other-net
|
|
|
|
Other-net
|
|
Amount of gain (loss) reclassified from OCI into income
|
|
$
|
(610
|
)
|
|
$
|
(10
|
)
|
Ineffective portion of hedge and amounts excluded from
|
|
|
|
|
|
|
|
|
Effectiveness testing:
|
|
|
|
|
|
|
|
|
Location of gain (loss) recognized in income on derivative
|
|
|
Other-net
|
|
|
|
Other-net
|
|
Amount of gain (loss) recognized in income on derivative
|
|
$
|
|
|
|
$
|
|
|
The Company secured a debt obligation with an embedded copper
derivative in October 2009. The derivative provided an economic
hedge for the Companys copper inventory against movements
in the market price of copper. However, the derivative did not
qualify as a hedge for accounting purposes and changes in its
fair value were charged against income in the current period. In
the first quarter 2010, the Company secured forward contracts to
reduce the variability of the charges against income due to
movements in the derivatives fair value. The
ineffectiveness on the embedded derivative and the forward
contract was a net $0.5 million expense in the first
quarter 2010 and was recorded in
other-net on
the Consolidated Statements of Income. The forward contracts and
the embedded copper derivative matured in subsequent quarters of
2010.
During the first quarter 2011, the Company secured a forward
contract to sell a specified quantity of gold. The contract
served as an economic hedge of gold purchased and held in
inventory for use in manufacturing products for sale in the
normal course of business. No hedge designation was assigned to
the contract. The contract matured in the first quarter 2011 and
resulted in a loss of $0.2 million that was recorded in
cost of sales on the Consolidated Statements of Income.
The Company expects to relieve $1.8 million from OCI and
charge
other-net on
the Consolidated Statements of Income in the twelve month period
beginning April 2, 2011.
10
|
|
Item 2.
|
Managements
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 markets, including consumer electronics,
defense and science, industrial components and commercial
aerospace, energy, automotive electronics, telecommunications
infrastructure, medical and appliance.
Sales of $374.8 million in the first quarter 2011
established a record high surpassing the previous record set in
the fourth quarter 2010 by 5%. We have set quarterly sales
records in four of the five most recent quarters. Sales in the
first quarter 2011 were also 27% higher than sales in the first
quarter 2010.
The sales growth in the first quarter 2011 resulted from the
continued strong demand across a number of our key markets,
including consumer electronics, industrial components and
commercial aerospace, automotive electronics and energy, and the
pass-through of higher metal prices.
Gross margin was $55.8 million in the first quarter 2011
compared to $49.3 million of margin in the first quarter
2010. The margin benefits from the higher volumes, improved
pricing and other factors combined to more than offset
start-up
related costs associated with the new beryllium facility and an
increase in manufacturing overhead costs.
The growth in gross margin netted with a modest increase in
selling, general and administrative (SG&A) expenses of 4%
(largely due to the costs associated with changing the company
name to Materion Corporation) and a minor net change in other
expenses resulted in a $4.9 million improvement in
operating profit in the first quarter 2011 over the first
quarter 2010. Interest expense was unchanged in the first
quarter 2011 from the first quarter 2010 while the tax rate was
lower (partially due to an unfavorable discrete event recorded
in the first quarter 2010). Net income improved
$5.1 million, from $6.7 million in the first quarter
2010 to $11.8 million in the first quarter 2011. Earnings
per share were $0.57 in the first quarter 2011 and $0.33 in the
first quarter 2010.
Debt increased $18.6 million in the first quarter 2011 in
order to finance capital expenditures and an increase in working
capital.
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(Millions, except per share amounts)
|
|
2011
|
|
|
2010
|
|
|
|
|
Sales
|
|
$
|
374.8
|
|
|
$
|
295.1
|
|
Operating profit
|
|
|
18.1
|
|
|
|
13.2
|
|
Income before income taxes
|
|
|
17.5
|
|
|
|
12.6
|
|
Net income
|
|
|
11.8
|
|
|
|
6.7
|
|
Diluted earnings per share
|
|
$
|
0.57
|
|
|
$
|
0.33
|
|
Sales of $374.8 million in the first quarter
2011 were $79.7 million, or 27%, higher than sales of
$295.1 million in the first quarter 2010. Sales have
improved over the corresponding quarter in the prior year for
six consecutive quarters.
Domestic sales grew approximately 34% in the first quarter 2011
over the first quarter 2010. International sales were
$95.1 million in the first quarter 2011, an 11% growth rate
over the international sales of $85.6 million in the first
quarter 2010. The majority of the international sales growth was
in Europe.
Sales to the majority of our key markets grew in the first
quarter 2011 over the first quarter 2010.
The consumer electronics market, which accounted for
approximately 40% of our total sales in the first quarter 2011,
showed the most growth as a result of improved demand for our
materials for smart phones, hand held electronic devices and
other applications.
11
Sales to the industrial components and commercial aerospace
market also contributed to the sales growth in the first
quarter 2011. The growth resulted from additional sales for
heavy equipment, plastic tooling and other applications. Sales
to this market accounted for 11% of first quarter 2011 sales.
Sales to the energy market also grew in the first quarter
largely due to the increased demand for our alloys for oil and
gas applications. Sales for architectural glass and solar energy
applications increased by more modest amounts. The energy market
represented approximately 8% of sales in the first quarter 2011.
Sales to the automotive electronics market, while only 5%
of our total sales, grew in excess of 25% in the first quarter
2011 over the first quarter 2010.
Medical market sales, which were approximately 5% of our
total first quarter 2011 sales, improved by a minor amount. We
believe that this market represents long-term growth potential
for our materials.
Sales to the defense and science market in the first
quarter 2011 were essentially unchanged from the first quarter
2010 although our traditional beryllium-based defense sales were
lower. Sales to this market accounted for 10% of our first
quarter 2011 sales, which was below the 2010 percentage.
Demand strengthened from the majority of our markets in the
first quarter 2010 after being weak during 2009 due to the
global economic crisis. We believe that the demand for our
products fell further than the decline in end-use consumer
spending due to excess inventories in the downstream supply
chain in 2009 and that a portion of the growth in demand and
sales in the first quarter 2010 may have been due to a
replenishment of inventories in the supply chain that were drawn
down throughout 2009.
In addition to improved demand, sales also grew in the first
quarter 2011 over the first quarter 2010 due to the pass-through
of higher metal prices. We use copper, gold, palladium,
platinum, ruthenium and silver in the manufacture of various
products. Our sales are affected by the prices for these metals,
as changes in our purchase price are passed on to our customers
in the form of higher or lower selling prices. Average prices
for these metals in the aggregate were higher in the first
quarter 2011 than in the first quarter 2010 and accounted for an
estimated $44.5 million of the $79.7 million increase
in sales between periods.
The sales order entry rate remained firm throughout the first
quarter 2011 as orders exceeded shipments in the quarter by
approximately 5%.
Gross margin was $55.8 million in the first
quarter 2011, an improvement of $6.5 million over the gross
margin of $49.3 million in the first quarter 2010. Gross
margin was 15% of sales in the first quarter 2011 and 17% of
sales in the first quarter 2010. Despite the increase in gross
margin dollars, the gross margin as a percent of sales was lower
due to the higher metal pass-through in sales in the first
quarter 2011.
The increased margin dollars in the first quarter 2011 resulted
from the margin contribution from the higher sales, improved
pricing in a portion of our business and a favorable change in
product mix. In addition, the majority of our facilities
continued to run at high production levels which create higher
machine utilization rates and operating efficiencies. Margins in
the first quarter 2010 had been reduced by lower than expected
manufacturing yields on welded products at the Elmore, Ohio
facility. The causes of the lower yields were identified and
resolved in subsequent quarters in 2010.
These margin benefits were partially offset by
start-up
costs and other inefficiencies with the new beryllium facility.
Construction and installation of this operation was nearing
completion and during the first quarter and into the second
quarter we were in the process of testing the equipment and
bringing it up on line.
Higher material prices due to the lag between receipt of an
order and the ultimate shipment of that order also had a
negative impact on margins in a portion of our business during
the first quarter 2011. Manufacturing overhead costs increased
14% in the first quarter 2011 over the first quarter 2010 as a
result of investments to support the current and projected
growth in the business, ongoing support costs for the new
beryllium facility, higher utility costs at various facilities
and other factors.
In the first quarter 2010, we recorded an estimated
$1.6 million margin benefit resulting from the reduction in
the projected year-end 2010 balance in a portion of our
inventory subject to
last-in,
first-out (LIFO) accounting and
12
the associated depletion of a LIFO inventory layer. There was no
corresponding benefit recorded in the first quarter 2011.
SG&A expenses were $31.6 million in the
first quarter 2011 compared to $30.3 million in the first
quarter 2010. As a percent of sales, SG&A expenses
decreased from 10% in the first quarter 2010 to 8% in the first
quarter 2011.
Costs associated with the company name change in the first
quarter 2011 totaled $1.6 million. We anticipate that there
will be additional administrative and marketing expenses
associated with the name change in subsequent quarters in 2011,
but those quarterly expenses should be less than the first
quarter 2011.
The incentive compensation expense under cash-based plans was
$1.2 million lower in the first quarter 2011 than the first
quarter 2010 due to differences in the projected level of annual
profit and other factors relative to the plans targets in
each year. Stock-based compensation expense of $1.0 million
in the first quarter 2011 was unchanged from the first quarter
2010.
Other corporate-directed initiatives designed to improve
long-term efficiencies and profitability added to SG&A
expenses during the first quarter 2011. Corporate information
technology costs increased in the first quarter 2011 over the
first quarter 2010 as a result of system development and support
efforts. Employment costs within SG&A also increased due to
higher domestic pension and 401(k) plan expenses. Various
expenses also increased in support of the higher sales level as
well.
Research and development (R&D) expenses were
$2.4 million in the first quarter 2011 versus
$1.7 million in the first quarter 2010. We increased our
R&D activities in portions of our business in the first
quarter 2011.
Other-net
expense was $3.7 million in the first quarter 2011
and $4.1 million in the first quarter 2010 as lower
exchange and translation losses, derivative ineffectiveness and
other items more than offset an increase in the metal
consignment fee. See Note H to the Consolidated Financial
Statements for details of the major components within
other-net
expense.
The metal consignment fee was $1.0 million higher in the
first quarter 2011 than in the first quarter 2010 largely due to
the increased value of the consigned precious metal on hand. The
additional copper pounds on consignment in the first quarter
2011 contributed to the higher fee as well.
Exchange and translation gains and losses are a function of the
movement in the value of the U.S. dollar versus certain
other currencies and in relation to the strike prices in
currency hedge contracts. The net exchange and translation
losses were $0.2 million lower in the first quarter 2011
than the first quarter 2010.
The derivative ineffectiveness expense of $0.5 million in
the first quarter 2010 resulted from movements in the fair
values of copper derivatives that did not qualify for hedge
accounting. These instruments matured in subsequent quarters in
2010 and there was no ineffectiveness associated with the
outstanding derivatives in the first quarter 2011.
Amortization of intangible assets of $1.5 million in the
first quarter 2011 was unchanged from the first quarter 2010.
Other-net
expense also includes bad debt expense, gains and losses on the
disposal of fixed assets, cash discounts and other non-operating
items. These items netted to a benefit of $0.3 million in
the first quarter 2011 versus an expense of $0.4 million in
the first quarter 2010.
Operating profit of $18.1 million in the
first quarter 2011 was a $4.9 million improvement over the
operating profit of $13.2 million in the first quarter
2010. The improved profitability resulted from the net margin
benefit from the higher sales, improved pricing and other
factors offset in part by an increase in expenses. Operating
profit was 5% of sales in the first quarter 2011 and 4% of sales
in the first quarter 2010.
Interest expense net was
$0.6 million in the first quarter 2011, unchanged from the
first quarter 2010. Average debt levels were similar in the two
periods while outstanding capital leases and the associated
interest costs were higher in the first quarter 2011. The
average borrowing rate was slightly lower in the first quarter
2011 than the first quarter 2010.
13
The income before income taxes and the
income tax expense for the first quarter 2011 and 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(Millions)
|
|
2011
|
|
|
2010
|
|
|
|
|
Income before income taxes
|
|
$
|
17.5
|
|
|
$
|
12.6
|
|
Income tax expense
|
|
|
5.7
|
|
|
|
5.9
|
|
Effective tax rate
|
|
|
32.4
|
%
|
|
|
46.6
|
%
|
The effects of percentage depletion, the production deduction,
executive compensation, foreign source income and deductions and
other items were major factors for the difference between the
effective and statutory rates in both the first quarter 2011 and
2010.
The tax expense of $5.9 million in the first quarter 2010
included a discrete item of $1.4 million for the reduction
of a deferred tax asset as a result of the Patient Protection
and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act. Beginning in 2013, we will no
longer be able to claim an income tax deduction for prescription
drug benefits provided to our retirees and reimbursed under the
Medicare Part D retiree drug subsidy program. While this
tax increase does not take effect until 2013, accounting
standards require that the carrying value of a deferred income
tax asset be adjusted in the period in which legislation
changing the applicable tax law is enacted.
There were no material discrete events affecting the tax rate in
the first quarter 2011.
Net income was $11.8 million (or $0.57 per
share, diluted) in the first quarter 2011 versus
$6.7 million (or $0.33 per share, diluted) in the first
quarter 2010.
Segment
Results
Changing our name from Brush Engineered Materials Inc. to
Materion Corporation in the first quarter 2011 did not alter our
senior management structure or how the chief operating decision
maker evaluates the performance of our businesses. We continue
to have the same four reportable segments as we had previously
with no change in their make up or reporting structure, although
the names of those segments were changed effective with the
reporting of the 2010 year-end results. Advanced Material
Technologies and Services was renamed Advanced Material
Technologies, Specialty Engineered Alloys was changed to
Performance Alloys, Beryllium and Beryllium Composites was
shortened to Beryllium and Composites, and Engineered Material
Systems was changed to Technical Materials.
Results by segment are depicted in Note F to the
Consolidated Financial Statements. The results for Materion
Services Inc. (formerly known as BEM Services, Inc.), a wholly
owned subsidiary that provides administrative and financial
services on a cost-plus basis to other units within the
organization, and other corporate costs are included in the All
Other column of our segment reporting.
The operating loss within All Other was $1.9 million higher
in the first quarter 2011 than the first quarter 2010 due to the
costs incurred to affect the company name change, other
corporate initiatives and higher manpower costs offset in part
by reductions in incentive compensation and derivative
ineffectiveness expense.
Advanced
Material Technologies
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(Millions)
|
|
2011
|
|
|
2010
|
|
|
|
|
Sales
|
|
$
|
256.6
|
|
|
$
|
203.0
|
|
Operating profit
|
|
|
10.7
|
|
|
|
8.5
|
|
Advanced Material Technologies manufactures
precious, non-precious and specialty metal products, including
vapor deposition targets, frame lid assemblies, clad and
precious metal preforms, high temperature braze materials,
ultra-fine wire, advanced chemicals, optics, performance
coatings and microelectronic packages. These products are used
in wireless, semiconductor, photonic, hybrid and other
microelectronic applications within the
14
consumer electronics and telecommunications infrastructure
markets. Other key markets for these products include medical,
defense and science, energy and industrial components. Advanced
Material Technologies also has metal cleaning operations and
in-house refineries that allow for the reclaim of precious
metals from internally generated or customers scrap. This
segment has domestic facilities in New York, Connecticut,
Wisconsin, New Mexico, Massachusetts and California and
international facilities in Asia and Europe.
Sales from Advanced Material Technologies totaled
$256.6 million in the first quarter 2011, a 26% improvement
over sales of $203.0 million in the first quarter 2010.
Advanced Material Technologies adjusts its selling prices daily
to reflect the current cost of the precious and certain other
metals that are sold. The cost of the metal is generally a
pass-through to the customer and a margin is generated on the
fabrication efforts irrespective of the type or cost of the
metal used in a given application. Therefore, the cost and mix
of metals sold will affect sales but not necessarily the margins
generated by those sales. The prices of gold, silver, platinum,
and palladium were higher on average in the first quarter 2011
than in the first quarter 2010 and increased sales an estimated
$40.2 million. Sales growth from all other factors was
$13.4 million.
Sales of products manufactured at the Buffalo, New York
facility, including targets, lids and wire, grew in the first
quarter 2011 over the first quarter 2010 due to the continued
increased demand for wireless, handset, semiconductor and other
microelectronic applications from the consumer electronics and
defense markets. Refine revenue also increased as a result of
additional metal to be reclaimed in the supply chain. Sales for
head applications within the data storage sector of the consumer
electronics market showed modest improvement in the first
quarter 2011.
Advanced chemical sales were higher in the first quarter 2011
than the first quarter 2010 due to growth from traditional
applications, including semiconductor and security. These
materials are also used in LED, solar energy and other
applications.
Sales of precision optics declined in the first quarter 2011
from the first quarter 2010. A portion of this decline was due
to softness in deep space, science and astronomy applications
within the defense and science market that are primarily
financed by government funding. The traditional precision optic
defense business remained firm and was supported by a solid
backlog.
Sales of precision polymer films into the medical market, after
adjusting for changes in gold prices, were lower in the first
quarter 2011 than the first quarter 2010. After our product was
requalified by a major customer, shipment volumes began to ramp
up in the first quarter 2011 over the lower volumes in the
fourth quarter 2010. We are also in the process of developing
additional medical applications for polymer films in conjunction
with key customers that we believe may have long-term growth
potential.
Sales of microelectronic packages, one of this segments
smaller product lines, declined 24% in the first quarter 2011
from the first quarter 2010. We anticipated that sales of
packages would decline in 2011 due to a change in technology
within the telecommunications infrastructure market.
The sales order entry rate for the segment exceeded sales by a
minor amount in the first quarter 2011.
Advanced Material Technologies generated a gross margin of
$29.1 million, or 11% of sales, in the first quarter 2011
compared to a gross margin of $27.1 million, or 13% of
sales, generated in the first quarter 2010.
The $2.0 million margin improvement resulted from a
combination of factors. The additional sales volume provided a
margin benefit while the change in product mix was favorable,
partially due to the increase in refining revenue. Inventory
write-downs and additional yield costs of $0.6 million
recorded in the first quarter 2010 did not repeat in the first
quarter 2011. Various facilities also made improvements in their
operating costs and efficiencies. The margin as a percent of
sales was lower in the first quarter 2011 than the first quarter
2010 due to the impact of the higher metal price pass-through.
Total SG&A, R&D and
other-net
expenses were $18.4 million (7% of sales) in the first
quarter 2011 versus $18.6 million (9% of sales) in the
first quarter 2010. Legal fees were $0.3 million lower in
the first quarter 2011 than in the first quarter 2010 due to
activity associated with the acquisition of Academy Corporation
(Academy) and the favorable resolution to pending litigation
matters during the first quarter of last year. We also recorded
$0.2 million
15
of severance costs in the first quarter 2010 and none in the
first quarter 2011. Incentive compensation was lower in the
first quarter 2011 than in the first quarter 2010. These savings
along with other miscellaneous cost savings and changes in
non-operating items were partially offset by an increase in the
metal consignment fee and higher marketing expenses in the first
quarter 2011.
Operating profit from Advanced Material Technologies totaled
$10.7 million in the first quarter 2011 and
$8.5 million in the first quarter 2010. Operating profit
was 4% of sales in both the first quarter 2011 and 2010.
Performance
Alloys
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(Millions)
|
|
2011
|
|
|
2010
|
|
|
|
|
Sales
|
|
$
|
84.4
|
|
|
$
|
63.4
|
|
Operating profit
|
|
|
8.8
|
|
|
|
3.3
|
|
Performance Alloys manufactures and sells three
main product families:
Strip products, the larger of the product families,
include thin gauge precision strip and thin diameter rod and
wire. These copper and nickel alloys provide a combination of
high conductivity, high reliability and formability for use as
connectors, contacts, switches, relays and shielding. Major
markets for strip products include consumer electronics,
telecommunications infrastructure, automotive electronics,
appliance and medical;
Bulk products are copper and nickel-based alloys
manufactured in plate, rod, bar, tube and other customized forms
that, depending upon the application, may provide superior
strength, corrosion or wear resistance, thermal conductivity or
lubricity. While the majority of bulk products contain
beryllium, a growing portion of bulk products sales is
from non-beryllium-containing alloys as a result of product
diversification efforts. Applications for bulk products include
oil and gas exploration and extraction components, bearings,
bushings, welding rods, plastic mold tooling, and undersea
telecommunications housing equipment; and,
Beryllium hydroxide is produced at our milling operations
in Utah from our bertrandite mine and purchased beryl ore. The
hydroxide is used primarily as a raw material input for strip
and bulk products and, to a lesser extent, by the Beryllium and
Composites segment. Sales of hydroxide are also made on a
limited basis.
Strip and bulk products are manufactured at facilities in Ohio
and Pennsylvania and are distributed internationally through a
network of company-owned service centers and outside
distributors and agents.
Sales by Performance Alloys were $84.4 million in the first
quarter 2011, a $21.0 million, or 33%, improvement over
sales of $63.4 million in the first quarter 2010. Sales
increased domestically and internationally, with strip and bulk
products both growing at double digit rates. A portion of the
sales growth was due to improved pricing. Sales have increased
versus the comparable quarter in the prior year for five
consecutive quarters.
Improved demand for our materials for applications within the
consumer electronics market, including smart phones and other
hand held electronic devices, contributed to the growth in strip
sales in the first quarter 2011 over the first quarter 2010.
Sales of strip products to the automotive electronics market
were also higher in the first quarter 2011 than the first
quarter 2010.
The higher bulk product sales in the first quarter 2011 resulted
in part from stronger demand from the oil and gas sector within
the energy market and for undersea telecommunications
applications, primarily in Asia. The demand for bulk products
from the industrial components and commercial aerospace market,
including heavy equipment and plastic tooling applications, also
improved in the first quarter 2011.
Strip product volumes shipped grew 3% in the first quarter 2011
over the first quarter 2010. The growth was primarily from thin
diameter rod and wire products. Bulk product volumes shipped
were 19% higher in the first quarter 2011 than the first quarter
2010.
Sales of beryllium hydroxide totaled $1.2 million in the
first quarter 2011. There were no sales of hydroxide in the
first quarter 2010.
16
Metal prices were higher in the first quarter 2011 than the
first quarter 2010 and the increased metal pass-through
accounted for an estimated $3.9 million of the
$21.0 million increase in sales between periods.
The sales order entry rate strengthened in the first quarter
2011 and exceeded sales in the first quarter 2011 by
approximately 11%. Order entry in the first quarter 2011 was
also approximately 35% higher than it was in the fourth quarter
2010.
Performance Alloys generated a gross margin of
$19.4 million, or 23% of sales, in the first quarter 2011
compared to a gross margin of $15.2 million, or 24% of
sales, in the first quarter 2010.
The majority of the margin improvement on a dollar basis was due
to the additional margin generated by the higher sales volume.
The manufacturing facilities continued to operate at high levels
of production and therefore they continue to generate operating
efficiencies. However, with the increase in order entry, lead
times for certain products have extended out. Gross margin in
the first quarter 2011 has also benefitted from the improved
pricing and a favorable change in product mix, including the
increase in shipments of rod and wire and various bulk products.
The previously discussed $1.6 million benefit from a LIFO
reserve adjustment flowed through Performance Alloys gross
margin in the first quarter 2010. There was no similar benefit
recorded in the first quarter 2011. The higher copper prices
also negatively impacted margins in the first quarter 2011 due
to the lag between when an order is received (and priced with
the current copper cost) and when it is ultimately shipped.
Total SG&A, R&D and
other-net
expenses were $10.6 million (13% of sales) in the first
quarter 2011 and $11.8 million (19% of sales) in the first
quarter 2010. A reduction in the incentive compensation expense
resulting from differences in the projected earnings relative to
the plan targets for each year accounted for the majority of the
lower expense. Cost control efforts continued in the first
quarter 2011 as various reductions in headcount due to
retirements were not replaced. Currency exchange losses were
lower in the first quarter 2011 than the first quarter 2010 as
well.
Performance Alloys operating profit was $8.8 million
in the first quarter 2011, an improvement of $5.5 million
over the operating profit of $3.3 million in the first
quarter 2010. Operating profit was 10% of sales in the first
quarter 2011 and 5% of sales in the first quarter 2010.
Beryllium
and Composites
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(Millions)
|
|
2011
|
|
|
2010
|
|
|
|
|
Sales
|
|
$
|
14.0
|
|
|
$
|
13.1
|
|
Operating profit
|
|
|
0.1
|
|
|
|
2.2
|
|
Beryllium and Composites manufactures
beryllium-based metals and metal matrix composites in rod,
sheet, foil and a variety of customized forms at the Elmore,
Ohio and Fremont, California facilities. These materials are
used in applications that require high stiffness
and/or low
density and they tend to be premium-priced due to their unique
combination of properties. This segment also manufactures
beryllia ceramics produced at the Tucson, Arizona facility.
Defense and science is the largest market for Beryllium and
Composites, while other markets served include industrial
components and commercial aerospace, medical, energy and
telecommunications infrastructure. Products are also sold for
acoustics and optical scanning applications.
Beryllium and Composites sales totaled $14.0 million in the
first quarter 2011, an increase of 7% from sales of
$13.1 million in the first quarter 2010.
The sales growth was largely due to a 49% increase in sales for
industrial component applications, which included higher
shipment of non-medical x-ray window materials from the Fremont
facility. Sales of beryllia ceramics improved 13% in the first
quarter 2011 over the first quarter 2010 largely as a result of
increased shipments for medical applications. The growth to
these two markets was partially offset by a 10% reduction in
sales for traditional defense applications due to changes in
government spending patterns. Sales to the energy and
telecommunications infrastructure markets in the first quarter
2011 were relatively unchanged from the first quarter 2010.
17
The order entry level was less than sales in the first quarter
2011, reflecting the softness in the defense and science market.
Beryllium and Composites generated a gross margin of
$3.1 million, or 23% of sales, in the first quarter 2011, a
decline of $1.1 million from the gross margin of
$4.2 million, or 32% of sales, generated in the first
quarter 2010.
Margins were reduced in the first quarter 2011 as a result of
additional costs and inefficiencies totaling approximately
$1.2 million associated with the
start-up of
the new beryllium facility. Construction of this facility, which
is designed to produce pure beryllium metal from beryllium
hydroxide, was nearing completion in the first quarter 2011 and
we incurred additional costs for supplies, maintenance and other
items as we worked to bring the equipment on line and resolve
other
start-up
challenges. Once operational later this year, this facility will
reduce the need to purchase pure beryllium metal from outside
suppliers.
The favorable margin benefit from the higher volume in the first
quarter 2011 as compared to the first quarter 2010 was generally
offset by an unfavorable product mix shift (partially due to the
lower traditional defense sales) and higher material input
costs. Overhead costs increased in the first quarter 2011 over
the first quarter 2010, including ongoing normal support costs
for the new facility. The gross margin in the first quarter 2010
was unfavorably affected by higher manufacturing yield losses on
welded products. Yields on these products improved in subsequent
quarters of last year.
SG&A, R&D and
other-net
expenses for Beryllium and Composites were $3.1 million, or
22% of sales, in the first quarter 2011 compared to
$2.1 million, or 16% of sales, in the first quarter 2010.
R&D costs increased in the first quarter 2011 over the
first quarter 2010 as a result of increased activities and
project work. Selling and marketing expenses also grew as a
result of higher manpower, services and other costs. Differences
in other income and expense and other non-operating items also
contributed to the higher expense level in the first quarter
2011.
Operating profit for Beryllium and Composites was
$0.1 million in the first quarter 2011 versus
$2.2 million in the first quarter 2010.
Technical
Materials
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(Millions)
|
|
2011
|
|
|
2010
|
|
|
|
|
Sales
|
|
$
|
19.7
|
|
|
$
|
15.5
|
|
Operating profit
|
|
|
2.2
|
|
|
|
1.0
|
|
Technical Materials manufactures clad inlay and
overlay metals, precious and base metal electroplated systems,
electron beam welded systems, contour profiled systems and
solder-coated metal systems. These specialty strip metal
products provide a variety of thermal, electrical or mechanical
properties from a surface area or particular section of the
material. Our cladding and plating capabilities allow for a
precious metal or brazing alloy to be applied to a base metal
only where it is needed, reducing the material cost to the
customer as well as providing design flexibility. Major
applications for these products include connectors, contacts and
semiconductors while the largest markets are automotive
electronics and consumer electronics. The energy and medical
markets are smaller but offer further growth opportunities.
Technical Materials products are manufactured at the
Lincoln, Rhode Island facility.
Sales from Technical Materials were $19.7 million in the
first quarter 2011, an increase of $4.2 million, or 27%,
over sales of $15.5 million in the first quarter 2010. The
majority of the increase was due to improved sales to the
automotive electronics market. Sales to the consumer electronics
market showed modest improvement, largely due to increased sales
of disk drive arms. Sales for emerging applications in the
energy market, while still relatively small, contributed to the
sales growth in the first quarter 2011 as well.
The order entry rate was approximately 9% higher than sales in
the first quarter 2011. The order rate strengthened in the
latter portion of the quarter.
18
Technical Materials generated a gross margin of
$4.4 million in the first quarter 2011, a $1.4 million
improvement over the $3.0 million of margin generated in
the first quarter 2010. Gross margin also improved to 22% of
sales in the first quarter 2011 from 20% of sales in the first
quarter 2010.
The growth in gross margin in the first quarter 2011 over the
first quarter 2010 was due to the benefits of the increased
sales volume. Labor and other direct manufacturing costs were
higher in the first quarter 2011, but the increase was
proportional to the increase in sales. Manufacturing overhead
costs were essentially unchanged.
Total SG&A, R&D and
other-net
expenses were $2.2 million, or 11% of sales, in the first
quarter 2011 and $2.0 million, or 13% of sales, in the
first quarter 2010. Selling and marketing expenses were higher,
mainly due to commissions and travel expenses which tend to vary
with sales. Metal consignment fees were higher in the first
quarter 2011 than the first quarter 2010 as a result of the
increased metal prices. Incentive compensation expense was also
higher in the first quarter 2011 due to the improved projected
annual profitability relative to the plan target.
Technical Materials operating profit improved from
$1.0 million in the first quarter 2010 to $2.2 million
in the first quarter 2011. Operating profit was 11% of sales in
the first quarter 2011 and 7% of sales in the first quarter 2010.
Legal
One of our subsidiaries, Materion Brush Inc. (formerly known as
Brush Wellman Inc.), is a defendant from time to time in
proceedings in various state and federal courts brought by
plaintiffs alleging that they have contracted chronic beryllium
disease or other lung conditions as a result of exposure to
beryllium. Plaintiffs in beryllium cases seek recovery under
negligence and various other legal theories and seek
compensatory and punitive damages, in many cases of an
unspecified sum. Spouses, if any, claim loss of consortium.
The following table summarizes the associated activity with
beryllium cases.
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
Year Ended
|
|
|
|
Apr. 1, 2011
|
|
|
Dec. 31, 2010
|
|
|
Total cases pending
|
|
|
1
|
|
|
|
2
|
|
Total plaintiffs
|
|
|
3
|
|
|
|
6
|
|
Number of claims (plaintiffs) filed during period ended
|
|
|
0(0
|
)
|
|
|
1(1
|
)
|
Number of claims (plaintiffs) settled during period ended
|
|
|
0(0
|
)
|
|
|
2(2
|
)
|
Aggregate cost of settlements during period ended (dollars in
thousands)
|
|
$
|
43
|
|
|
$
|
20
|
|
Number of claims (plaintiffs) otherwise dismissed
|
|
|
1(3
|
)
|
|
|
1(1
|
)
|
Although the parties agreed to settle and dismiss the one case
shown as pending as of April 1, 2011 for $43,000 during the
first quarter 2011, the court did not dismiss the case until
early in the second quarter 2011. The other case that was
pending as of December 31, 2010 was dismissed with no
settlement payment during the first quarter 2011.
Additional beryllium claims may arise. Management believes that
we have substantial defenses in these cases and intends to
contest the suits vigorously. Employee cases, in which
plaintiffs have a high burden of proof, have historically
involved relatively small losses to us. Third-party plaintiffs
(typically employees of customers or contractors) face a lower
burden of proof than do employees or former employees, but these
cases are generally covered by varying levels of insurance.
Although it is not possible to predict the outcome of any
litigation that may be pending against our subsidiaries and us,
we provide for costs related to these matters when a loss is
probable and the amount is reasonably estimable. Litigation is
subject to many uncertainties, and it is possible that some of
these actions could be decided unfavorably in amounts exceeding
our reserves. An unfavorable outcome or settlement of a
beryllium case or additional adverse media coverage could
encourage the commencement of additional similar litigation. We
are unable to estimate our potential exposure to unasserted
claims.
19
Based upon currently known facts and assuming collectibility of
insurance, we do not believe that resolution of future beryllium
proceedings will have a material adverse effect on our financial
condition or cash flow. However, our results of operations could
be materially affected by unfavorable results in one or more of
these cases.
Regulatory Matters. Standards for
exposure to beryllium are under review by the United States
Occupational Safety and Health Administration (OSHA) and by
other governmental and private standard-setting organizations.
One result of these reviews will likely be more stringent worker
safety standards. Some organizations, such as the California
Occupational Health and Safety Administration and the American
Conference of Governmental Industrial Hygienists, have adopted
standards that are more stringent than the current standards of
OSHA. The development, proposal or adoption of more stringent
standards may affect the buying decisions by the users of
beryllium-containing products. If the standards are made more
stringent
and/or our
customers or other downstream users decide to reduce their use
of beryllium-containing products, our results of operations,
liquidity and financial condition could be materially adversely
affected. The impact of this potential adverse effect would
depend on the nature and extent of the changes to the standards,
the cost and ability to meet the new standards, the extent of
any reduction in customer use and other factors. The magnitude
of this potential adverse effect cannot be estimated.
Financial
Position
Net cash used in operations was $20.8 million
in the first quarter 2011 as the net unfavorable change in
working capital, primarily increases to accounts receivable and
inventory and a decrease to other liabilities and accrued items,
more than offset net income and the benefits of depreciation and
amortization.
Cash totaled $12.0 million as of the end of
the first quarter 2011, a decrease of $4.1 million from the
year-end 2010 balance of $16.1 million.
Accounts receivable of $153.4 million as of
the end of the first quarter 2011 were $14.0 million, or
10%, higher than the year-end 2010 balance of
$139.4 million. Approximately half of this growth was due
to the higher sales volume in the first quarter 2011 than the
fourth quarter 2010. The remainder of the growth was due to a
slight slow down in the days sales outstanding (DSO), a measure
of how quickly receivables are collected, to approximately
37 days. This DSO level, however, is still within the
normal range for our operations.
We continue to aggressively monitor and manage our credit
exposures and the collectability of our receivables. The bad
debt expense in the first quarter 2011 was only
$0.1 million.
Other receivables of $3.0 million at the end
of the first quarter 2011 and $4.0 million at the end of
2010 primarily represented the amounts due for billings under a
government contract to construct the beryllium production
facility. The balances at the end of both periods also included
minor amounts due for other non-trade items.
Inventories totaled $176.4 million as of
April 1, 2011, an increase of $21.9 million, or 14%,
from the $154.5 million balance at December 31, 2010.
The majority of the increase in inventories was in Performance
Alloys largely in order to support the growing level of demand.
Performance Alloys pounds in inventory increased by 13%
during the quarter. The high level of demand on the factories
has also led to longer lead times on certain products, which in
turn contributed to the increase in inventory levels.
Inventories within Beryllium and Composites also increased due
to the timing of shipments and higher production costs.
Inventories within Advanced Material Technologies increased by
an immaterial amount during the quarter as the majority of this
segments production requirements are maintained on
off-balance sheet consignment arrangements.
Technical Materials reduced their inventories by approximately
10% during the first quarter 2011 despite an increase in sales
volumes. Their inventory turns, a measure of how efficiently
inventory is utilized, improved accordingly.
20
The costs of various raw materials increased in the first
quarter 2011. However, we use the LIFO method for valuing a
large portion of our domestic inventories. By so doing, the most
recent cost of various raw materials, including gold and copper,
is generally charged to cost of sales in the current period. The
older, and often times lower, costs are used to value the
inventory on hand under the LIFO method. Therefore, current
changes in the cost of raw materials subject to the LIFO
valuation method have only a minimal impact on changes in the
inventory carrying value.
Capital expenditures for the first quarter 2011
and 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
(Millions)
|
|
2011
|
|
|
2010
|
|
|
|
|
Capital expenditures
|
|
$
|
3.9
|
|
|
$
|
13.3
|
|
Mine development
|
|
|
0.1
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
4.0
|
|
|
|
15.8
|
|
Reimbursement for spending under government contract
|
|
|
1.1
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
Net spending
|
|
$
|
2.9
|
|
|
$
|
10.4
|
|
|
|
|
|
|
|
|
|
|
We have a Title III contract with the U.S. Department
of Defense (DoD) for the design and development of a new
facility for the production of primary beryllium. As noted, the
facility was nearing completion in the first quarter 2011. The
total cost of the project is estimated to be $95.0 million,
with the DoD providing approximately 75% of the funding. The
final cost of the project and the DoDs share will be
determined based upon the satisfactory completion of the final
construction items, resolution of any
start-up
issues and other factors. Spending on this project included
within the $3.9 million of expenditures in the above table
totaled $0.4 million in the first quarter 2011. The
reimbursement received from the government of $1.1 million
exceeded the spending in the first quarter 2011 due to a normal
lag between when the spending occurs and the government issues
the reimbursement. Reimbursements from the DoD are recorded as
unearned income and included in other long-term liabilities on
the Consolidated Balance Sheets.
The remainder of the capital spending was on isolated pieces of
new equipment, upgrades to existing equipment and various
infrastructure projects. Advanced Material Technologies spent
$1.4 million in the first quarter 2011 and included
spending on an expansion of the shield kit cleaning operations.
Capital spending within Performance Alloys totaled
$1.2 million. Capital spending in the first quarter 2011
also included various information technology projects.
Capital spending was below the level of depreciation in the
first quarter 2011.
Intangible assets were $35.2 million as of
April 1, 2011, a decline of $1.6 million from the
December 31, 2010 balance due to the current period
amortization. No intangible assets were acquired during the
first quarter 2011.
Other liabilities and accrued items were
$45.6 million at the end of the first quarter 2011, a
decline of $14.3 million from the $59.9 million
balance as of year-end 2010. The major cause for the decline was
the payment of the 2010 annual incentive compensation to
employees during the first quarter 2011. The balances of various
liabilities also changed due to business levels, seasonal
factors or other causes.
Unearned revenue, which is a liability
representing products invoiced to customers but not shipped, was
$3.0 million at the end of the first quarter 2011 versus
$2.4 million as of December 31, 2010. Revenue and the
associated margin will be recognized for these transactions when
the goods ship, title passes and all other revenue recognition
criteria are met. Invoicing in advance of the shipment, which is
only done in certain circumstances, allows us to collect cash
sooner than we would otherwise.
Other long-term liabilities were
$17.9 million as of the end of the first quarter 2011,
unchanged from the year-end 2010 balance. Declines in the
outstanding capital lease balance due to payments and the legal
reserve due to resolution of two cases were offset by increases
in other miscellaneous liabilities.
Unearned income was $58.3 million at the end
of the first quarter 2011 and $57.2 million at year-end
2010. This balance represents reimbursements from the government
for equipment purchases for the new beryllium
21
facility made under the Title III program. Once the
equipment is placed in service later in 2011, this liability
will be reduced and credited to income ratably with the
depreciation expense on the equipment.
The retirement and post-employment benefit balance
was $82.0 million at the end of the first quarter 2011, a
decline of $0.5 million from the $82.5 million balance
at December 31, 2010. This balance represents the liability
under our domestic defined benefit pension plan, the retiree
medical plan and other retirement plans and post-employment
obligations.
The liability for the domestic pension plan declined a net
$0.7 million as a result of the contributions to the plan
of $1.8 million and an adjustment to other comprehensive
income, a component of shareholders equity, of
$0.9 million offset in part by a current quarter expense of
$2.0 million.
The liability for the other retirement plans changed by minor
amounts due to differences between the payments made and the
quarterly expense and other factors.
Debt totaled $104.7 million at the end of the
first quarter 2011 compared to $86.1 million as of year-end
2010. The additional borrowings were used to fund the increase
in working capital and the capital expenditures during the
quarter.
Outstanding short-term debt, which included domestic and foreign
currency denominated loans, was $56.4 million as of the end
of the first quarter 2011. Long-term debt totaled
$48.3 million as of the end of the first quarter 2011, none
of which was currently payable. We were in compliance with all
of our debt covenants as of the end of the first quarter 2011.
Shareholders equity of $399.2 million
as of the end of the first quarter 2011 was an increase of
$14.9 million from year-end 2010. The increase was
primarily due to the comprehensive income of $13.5 million
(see Note E to the Consolidated Financial Statements).
Equity was also affected by stock compensation expense, the
exercise of stock options and other factors.
Prior
Year Financial Position
Net cash used in operations was $15.8 million in the first
quarter 2010 as the increase in working capital items, primarily
accounts receivable and inventory, more than offset the net
income and the benefits of depreciation and amortization.
Accounts receivable grew $29.4 million, or 35%, in the
first quarter 2010 due to the higher sales volumes offset in
part by an improvement in the collection period. Inventories
increased $10.4 million, or 8%, in the first quarter 2010,
in order to support the higher business levels. Inventory
turnover improved in the first quarter 2010 over the year-end
2009 level. Inventories within each of the four reportable
segments grew during the first quarter 2010. The acquisition of
Academy contributed to the growth in receivables and inventory
in the first quarter 2010 over the year-end 2009 levels.
Other liabilities and accrued items increased $2.0 million
in the first quarter 2010 due to the current year incentive
compensation expense, the acquisition of Academy and other
factors. The retirement and post-employment benefit balance
declined $2.3 million from the balance at December 31,
2009, largely as a result of the contributions to the domestic
defined benefit pension plan of $2.9 million offset in part
by other factors.
Capital expenditures, net of reimbursements from the government
for purchases made for the beryllium facility in accordance with
the Title III contract, totaled $10.4 million.
Spending included $2.5 million on mine development at our
Utah site.
We purchased the outstanding capital stock of Academy for
$22.7 million in January 2010. Immediately after the
purchase, we transferred ownership of Academys precious
metal inventory to a financial institution for its fair value
and consigned it back under our existing consignment lines.
Outstanding debt totaled $108.8 million at the end of the
first quarter 2010, an increase of $44.3 million from the
balance as of year-end 2009. The increase in borrowings along
with a portion of the excess cash was used to fund the
acquisition of Academy, capital expenditures and the cash used
in operations. Cash balances totaled $11.1 million at the
end of the first quarter 2010, a decline of $1.1 million
since year-end 2009.
22
Off-balance
Sheet Arrangements and Contractual Obligations
We maintain the majority of our precious metals that 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. We also maintain a portion of our copper
requirements on consignment. The balance outstanding under these
off-balance sheet consignment arrangements totaled
$270.5 million at the end of the first quarter 2011
compared to $211.8 million outstanding as of year-end 2010.
The increase in the outstanding balance was due to higher metal
prices, additional metal held in the refine system (which has
long processing times) and other factors.
We negotiated an increase to the available capacity under the
existing off-balance sheet consignment arrangements during the
first quarter 2011. The available and unused capacity under the
metal financing lines totaled approximately $69.5 million
as of April 1, 2011.
We were in compliance with the covenants contained in our
consignment agreements as of April 1, 2011.
While our borrowings under existing lines of credit have
increased during the first quarter 2011, we have not entered
into any new loan agreements since year-end 2010. For additional
information on our contractual obligations, please see
page 41 of our Annual Report on
Form 10-K
for the year ended December 31, 2010.
Liquidity
We believe funds from operations plus the available borrowing
capacity and the current cash balance are adequate to support
operating requirements, capital expenditures, projected pension
plan contributions, strategic acquisitions and environmental
remediation projects.
The total
debt-to-debt-plus-equity
ratio, a measure of balance sheet leverage, was 21% as of the
end of the first quarter 2011, an increase from 18% as of
December 31, 2010. The increase in this ratio was largely
due to the additional borrowings used to finance the
$20.8 million of cash used in operations in the first
quarter 2011. It is not unusual for us to consume cash in the
first quarter of a given year. In each of the last eight years,
we consumed cash in the first quarter and then generated cash
from operations over the balance of the year.
The available and unused borrowing capacity under the existing
lines of credit, which is subject to limitations set forth in
the debt covenants, was $152.9 million as of the end of the
first quarter 2011.
While the capacity under the precious metal consignment lines
was increased during the first quarter 2011, should metal
requirements increase in future periods, because of higher
volumes
and/or
prices, we may use the available capacity under the existing
credit lines to purchase, rather than consign metal
and/or
require customers to supply more of their own metal.
Critical
Accounting Policies
For additional information regarding critical accounting
policies, please refer to pages 43 to 46 of our Annual Report on
Form 10-K
for the year ended December 31, 2010. There have been no
material changes in our critical accounting policies since the
inclusion of this discussion in our Annual Report on
Form 10-K.
Market
Risk Disclosures
For information regarding market risks, please refer to pages 47
to 48 of our Annual Report on
Form 10-K
for the year ended December 31, 2010. There have been no
material changes in our market risks since the inclusion of this
discussion in our Annual Report on
Form 10-K.
Outlook
Order entry exceeded the record sales level in the first quarter
2011 and the order entry rate remained at high levels in the
early portion of the second quarter 2011. Demand from a number
of our key markets continues to be solid, including consumer
electronics, industrial components and commercial aerospace,
automotive electronics and energy. Shipments to the medical
market have improved from the lower levels in the fourth quarter
2010 while portions of our traditional defense business remain
soft.
23
Our margins in the second quarter 2011 will be affected by the
ongoing
start-up of
the new beryllium facility as we continue our efforts to bring
this significant operation on line. Margins should continue to
benefit from the high level of production and the related
efficiencies. Steps are being taken to manage the extended lead
times caused by the high level of demand on certain operations.
Profitability will also be affected in the second quarter by the
cost of various initiatives, including the corporate rebranding
effort (although not to the same level as it was in the first
quarter 2011).
We remain cautious over the current high cost of gold, silver,
copper and other key raw materials and the impact these prices
may have on our business levels, related operating margins and
financing structure.
Forward-Looking
Statements
Portions of the narrative set forth in this document that are
not statements of historical or current facts are
forward-looking statements, in particular the outlook provided
above. Our actual future performance may materially differ from
that contemplated by the forward-looking statements as a result
of a variety of factors. These factors include, in addition to
those mentioned elsewhere herein:
|
|
|
|
|
The global economy;
|
|
|
|
The condition of the markets which we serve, whether defined
geographically or by segment, with the major market segments
being: consumer electronics, defense and science, industrial
components and commercial aerospace, automotive electronics,
telecommunications infrastructure, appliance, medical, energy
and services.
|
|
|
|
Changes in product mix and the financial condition of customers;
|
|
|
|
Actual sales, operating rates and margins for 2011;
|
|
|
|
Our success in developing and introducing new products and new
product
ramp-up
rates;
|
|
|
|
Our success in passing through the costs of raw materials to
customers or otherwise mitigating fluctuating prices for those
materials, including the impact of fluctuating prices on
inventory values;
|
|
|
|
Our success in integrating newly acquired businesses, including
the acquisitions of Barr Associates, Inc. and Academy
Corporation;
|
|
|
|
The impact of the results of Barr Associates, Inc. and Academy
Corporation on our ability to achieve fully 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, including the new primary beryllium
facility being constructed in Elmore, Ohio;
|
|
|
|
The availability of adequate lines of credit and the associated
interest rates;
|
|
|
|
Other financial factors, including the cost and availability of
raw materials (both base and precious metals), metal financing
fees, tax rates, exchange rates, pension costs and required cash
contributions and other employee benefit costs, energy costs,
regulatory compliance costs, the cost and availability of
insurance, and the impact of the Companys stock price on
the cost of incentive compensation plans;
|
|
|
|
The uncertainties related to the impact of war, terrorist
activities and acts of God, including the recent earthquake and
tsunami in Japan;
|
|
|
|
Changes in government regulatory requirements and the enactment
of new legislation that impacts our obligations and operations;
|
|
|
|
The conclusion of pending litigation matters in accordance with
our expectation that there will be no material adverse effects;
|
|
|
|
The amount and timing of repurchases of our Common Stock, if any;
|
24
|
|
|
|
|
The timing and ability to achieve further efficiencies and
synergies resulting from our name change and business unit
alignment under the Materion name and Materion brand; and
|
|
|
|
The risk factors set forth in Part 1, Item 1A of our
Annual Report on
Form 10-K
for the year ended December 31, 2010.
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
For information about our market risks, please refer to our
Annual Report on
Form 10-K
for the period ended December 31, 2010.
|
|
Item 4.
|
Controls
and Procedures
|
We carried out an evaluation under the supervision and with
participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of April 1, 2011 pursuant to
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that
our disclosure controls and procedures were effective as of the
evaluation date.
There have been no changes in our internal control over
financial reporting, that occurred during the quarter ended
April 1, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
25
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
Our subsidiaries and our holding company are subject, from time
to time, to a variety of civil and administrative proceedings
arising out of our normal operations, including, without
limitation, product liability claims, health, safety and
environmental claims and employment-related actions. Among such
proceedings are the cases described below.
Beryllium
Claims
As of April 1, 2011, our subsidiary, Materion Brush Inc.,
was a defendant in one proceeding in state court brought by
plaintiffs alleging that they have contracted, or have been
placed at risk of contracting, beryllium sensitization or
chronic beryllium disease or other lung conditions as a result
of exposure to beryllium. Plaintiffs in beryllium cases seek
recovery under negligence and various other legal theories and
seek compensatory and punitive damages, in many cases of an
unspecified sum. Spouses of some plaintiffs claim loss of
consortium.
During the first quarter of 2011, the number of beryllium cases
decreased from two cases (involving six plaintiffs) as of
December 31, 2010 to one case (involving three plaintiffs)
as of April 1, 2011. One case (involving one plaintiff) was
voluntarily dismissed by the plaintiff. In one case (involving
five plaintiffs), two spouses dismissed their consortium claims,
and the three remaining plaintiffs have settled their case, but
the case had not been dismissed by the court at the end of the
quarter. No cases were filed during the quarter.
The Company has some insurance coverage, subject to an annual
deductible.
|
|
Item 5.
|
Other
Information
|
Mine
Safety and Health Administration Data
Materion Natural Resources Inc. (formerly known as Brush
Resources Inc.), a wholly owned subsidiary, operates a beryllium
mining complex in the State of Utah which is regulated by both
the U.S. Mine Safety and Health Administration
(MSHA) and state regulatory agencies. We endeavor to
conduct our mining and other operations in compliance with all
applicable federal, state and local laws and regulations. We
present information below regarding certain mining safety and
health citations which MSHA has levied with respect to our
mining operations.
Materion Natural Resources Inc. did not receive any written
notice of a pattern of violations under Section 104(e) of
the Mine Act, nor the potential to have such a pattern, and they
experienced no mining-related fatalities during the current
quarter ended April 1, 2011.
For reporting purposes of The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, we include the following table
that sets forth the total number of specific citations and
orders and the total dollar value of the proposed civil penalty
assessments that were issued by MSHA during the current quarter
ended April 1, 2011, pursuant to the Mine Act, for Materion
Natural Resources Inc.:
Additional information follows about MSHA references used in the
table.
|
|
|
|
|
Section 104(a) Citations: The total number of violations
received from MSHA under section 104(a) that are
significant and substantial citations which are for alleged
violations of a mining safety standard or regulation where there
exits a reasonable likelihood that the hazard could result in an
injury or illness of a reasonably serious nature.
|
|
|
|
Section 104(b) Orders: The total number of orders issued by
MSHA under section 104(b) of the Mine Act, which represents
a failure to abate a citation under section 104(a) within
the period of time prescribed by MSHA. This results in an order
of immediate withdrawal from the area of the mine affected by
the condition until MSHA determines that the violation has been
abated.
|
26
|
|
|
|
|
Section 104(d) Citations and Orders: The total number of
citations and orders issued by MSHA under section 104(d) of
the Mine Act for unwarrantable failure to comply with mandatory
health or safety standards.
|
|
|
|
Section 110(b)(2) Violations: The total number of flagrant
violations issued by MSHA under section 110(b)(2) of the
Mine Act.
|
|
|
|
Section 107(a) Orders: The total number of orders issued by
MSHA under section 107(a) of the Mine Act for situations in
which MSHA determined an imminent danger existed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mine Act
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
|
|
|
Section 104(a)
|
|
|
|
|
|
Mine Act
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Significant &
|
|
|
Mine Act
|
|
|
Section 104(d)
|
|
|
Mine Act
|
|
|
Mine Act
|
|
|
Proposed
|
|
|
|
|
Substantial
|
|
|
Secton 104(b)
|
|
|
Citations &
|
|
|
Section 110(b)(2)
|
|
|
Section 107(a)
|
|
|
MSHA
|
|
Mine ID#
|
|
|
Citations
|
|
|
Orders
|
|
|
Orders
|
|
|
Violations
|
|
|
Orders
|
|
|
Assessments
|
|
|
|
|
|
4200706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Pending Legal Actions. The Federal Mine Safety and Health Review
Commission is an independent adjudicative agency that provides
administrative trial and appellate review of legal disputes
arising under the Mine Act. These cases may involve, among other
questions, challenges by operators to citations, orders and
penalties they have received from MSHA, or complaints of
discrimination by miners under Section 105 of the Mine Act.
For the quarter ended April 1, 2011, no legal actions are
pending.
|
|
|
|
|
|
3
|
.1
|
|
Amendment to Amended and Restated Articles of Incorporation
(filed as Exhibit 3(a) to the Companys
Form 8-K
(File
No. 1-15885)
on March 8, 2011), incorporated herein by reference.
|
|
4
|
.1
|
|
Amendment No. 1 to the Third Amended and Restated Precious
Metals Agreement dated March 31, 2011, between Materion
Corporation and other borrowers and The Bank of Nova Scotia
(filed as Exhibit 10.1 to the Companys
Form 8-K
(File
No. 1-15885)
on April 6, 2011), incorporated herein by reference.
|
|
10
|
.1
|
|
Amendment No. 5 to the Consignment Agreement dated
March 7, 2011 between Brush Engineered Materials Inc. and
Canadian Imperial Bank of Commerce and CIBC World Markets Inc.
|
|
11
|
|
|
Statement regarding computation of per share earnings.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer required by
Rule 13a-14(a)
or 15d-14(a).
|
|
31
|
.2
|
|
Certification of Chief Financial Officer required by
Rule 13a-14(a)
or 15d-14(a).
|
|
32
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MATERION CORPORATION
John D. Grampa
Senior Vice President Finance and
Chief Financial Officer
Dated: April 29, 2011
28