e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
(Mark One)
|
|
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended July 1, 2011
|
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period
from
to
Commission file number
001-15885
MATERION CORPORATION
(Exact name of Registrant as
specified in charter)
|
|
|
Ohio
|
|
34-1919973
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
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|
|
|
6070 Parkland Blvd., Mayfield Hts., Ohio
(Address of principal executive
offices)
|
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44124
(Zip Code)
|
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 þ 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 definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer þ
|
Non-accelerated
filer o
|
Smaller
reporting
company o
|
(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 July 29, 2011 there were 20,437,415 common shares, no
par value, outstanding.
PART I
FINANCIAL INFORMATION
MATERION
CORPORATION AND SUBSIDIARIES
|
|
Item 1.
|
Financial
Statements
|
The consolidated financial statements of Materion Corporation
and its subsidiaries for the second quarter and first half ended
July 1, 2011 are as follows:
1
Consolidated
Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Second Quarter Ended
|
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First Half Ended
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July 1,
|
|
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July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(Thousands except per share amounts)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Net sales
|
|
$
|
424,710
|
|
|
$
|
325,946
|
|
|
$
|
799,515
|
|
|
$
|
621,028
|
|
Cost of sales
|
|
|
362,039
|
|
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|
270,093
|
|
|
|
681,043
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|
|
|
515,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
62,671
|
|
|
|
55,853
|
|
|
|
118,472
|
|
|
|
105,167
|
|
Selling, general and administrative expense
|
|
|
34,048
|
|
|
|
30,611
|
|
|
|
65,691
|
|
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|
60,950
|
|
Research and development expense
|
|
|
2,714
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|
|
|
1,798
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|
|
|
5,124
|
|
|
|
3,483
|
|
Other-net
|
|
|
5,064
|
|
|
|
2,946
|
|
|
|
8,735
|
|
|
|
7,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
20,845
|
|
|
|
20,498
|
|
|
|
38,922
|
|
|
|
33,703
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Interest expense net
|
|
|
613
|
|
|
|
691
|
|
|
|
1,198
|
|
|
|
1,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
20,232
|
|
|
|
19,807
|
|
|
|
37,724
|
|
|
|
32,393
|
|
Income tax expense
|
|
|
6,360
|
|
|
|
6,088
|
|
|
|
12,034
|
|
|
|
11,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income
|
|
$
|
13,872
|
|
|
$
|
13,719
|
|
|
$
|
25,690
|
|
|
$
|
20,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock basic
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$
|
0.68
|
|
|
$
|
0.68
|
|
|
$
|
1.26
|
|
|
$
|
1.01
|
|
Weighted-average number of common shares outstanding
basic
|
|
|
20,421
|
|
|
|
20,323
|
|
|
|
20,388
|
|
|
|
20,290
|
|
Net income per share of common stock diluted
|
|
$
|
0.67
|
|
|
$
|
0.67
|
|
|
$
|
1.23
|
|
|
$
|
1.00
|
|
Weighted-average number of common shares outstanding
diluted
|
|
|
20,832
|
|
|
|
20,600
|
|
|
|
20,812
|
|
|
|
20,534
|
|
See Notes to Consolidated Financial Statements.
2
Consolidated
Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
Dec. 31,
|
|
(Thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
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|
Cash and cash equivalents
|
|
$
|
9,461
|
|
|
$
|
16,104
|
|
Accounts receivable
|
|
|
149,386
|
|
|
|
139,374
|
|
Other receivables
|
|
|
2,679
|
|
|
|
3,972
|
|
Inventories
|
|
|
182,389
|
|
|
|
154,467
|
|
Prepaid expenses
|
|
|
37,468
|
|
|
|
31,743
|
|
Deferred income taxes
|
|
|
10,241
|
|
|
|
10,065
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
391,624
|
|
|
|
355,725
|
|
Related-party notes receivable
|
|
|
90
|
|
|
|
90
|
|
Long-term deferred income taxes
|
|
|
2,042
|
|
|
|
2,042
|
|
Property, plant and equipment cost
|
|
|
731,727
|
|
|
|
719,953
|
|
Less allowances for depreciation, depletion and amortization
|
|
|
(473,743
|
)
|
|
|
(454,085
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment net
|
|
|
257,984
|
|
|
|
265,868
|
|
Intangible assets
|
|
|
34,207
|
|
|
|
36,849
|
|
Other assets
|
|
|
7,831
|
|
|
|
1,900
|
|
Goodwill
|
|
|
72,936
|
|
|
|
72,936
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
766,714
|
|
|
$
|
735,410
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
39,331
|
|
|
$
|
47,835
|
|
Accounts payable
|
|
|
37,912
|
|
|
|
33,375
|
|
Salaries and wages
|
|
|
22,181
|
|
|
|
34,035
|
|
Taxes other than income taxes
|
|
|
256
|
|
|
|
905
|
|
Other liabilities and accrued items
|
|
|
26,705
|
|
|
|
24,911
|
|
Unearned revenue
|
|
|
2,835
|
|
|
|
2,378
|
|
Income taxes
|
|
|
|
|
|
|
3,921
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
129,220
|
|
|
|
147,360
|
|
Other long-term liabilities
|
|
|
18,092
|
|
|
|
17,915
|
|
Retirement and post-employment benefits
|
|
|
81,588
|
|
|
|
82,502
|
|
Unearned income
|
|
|
59,724
|
|
|
|
57,154
|
|
Long-term income taxes
|
|
|
2,905
|
|
|
|
2,906
|
|
Deferred income taxes
|
|
|
4,010
|
|
|
|
4,912
|
|
Long-term debt
|
|
|
55,693
|
|
|
|
38,305
|
|
Shareholders equity
|
|
|
415,482
|
|
|
|
384,356
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
766,714
|
|
|
$
|
735,410
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
3
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
First Half Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
(Thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
Net income
|
|
$
|
25,690
|
|
|
$
|
20,440
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
22,425
|
|
|
|
17,100
|
|
Amortization of deferred financing costs in interest expense
|
|
|
233
|
|
|
|
282
|
|
Derivative financial instrument ineffectiveness
|
|
|
|
|
|
|
489
|
|
Stock-based compensation expense
|
|
|
2,191
|
|
|
|
1,988
|
|
Changes in assets and liabilities net of acquired assets and
liabilities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
(8,627
|
)
|
|
|
(58,366
|
)
|
Decrease (increase) in other receivables
|
|
|
1,293
|
|
|
|
6,229
|
|
Decrease (increase) in inventory
|
|
|
(26,805
|
)
|
|
|
(10,276
|
)
|
Decrease (increase) in prepaid and other current assets
|
|
|
(5,561
|
)
|
|
|
(1,147
|
)
|
Decrease (increase) in deferred income taxes
|
|
|
(200
|
)
|
|
|
6,117
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
(6,415
|
)
|
|
|
(1,798
|
)
|
Increase (decrease) in unearned revenue
|
|
|
454
|
|
|
|
(29
|
)
|
Increase (decrease) in interest and taxes payable
|
|
|
(4,346
|
)
|
|
|
(359
|
)
|
Increase (decrease) in long-term liabilities
|
|
|
(1,655
|
)
|
|
|
(1,265
|
)
|
Other net
|
|
|
(5,814
|
)
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,137
|
)
|
|
|
(20,654
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments for purchase of property, plant and equipment
|
|
|
(11,103
|
)
|
|
|
(24,768
|
)
|
Payments for mine development
|
|
|
(183
|
)
|
|
|
(7,425
|
)
|
Reimbursements for capital equipment under government contracts
|
|
|
2,570
|
|
|
|
14,915
|
|
Payments for purchase of business net of cash received
|
|
|
|
|
|
|
(20,605
|
)
|
Proceeds from transfer of acquired inventory to consignment line
|
|
|
|
|
|
|
5,667
|
|
Proceeds from sale of property, plant and equipment
|
|
|
33
|
|
|
|
76
|
|
Other investments net
|
|
|
13
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,670
|
)
|
|
|
(32,126
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of short-term debt
|
|
|
(8,522
|
)
|
|
|
(14,035
|
)
|
Proceeds from issuance of long-term debt
|
|
|
42,472
|
|
|
|
70,000
|
|
Repayment of long-term debt
|
|
|
(25,083
|
)
|
|
|
|
|
Debt issuance costs
|
|
|
(623
|
)
|
|
|
|
|
Principal payments under capital lease obligations
|
|
|
(441
|
)
|
|
|
(55
|
)
|
Issuance of common stock under stock option plans
|
|
|
698
|
|
|
|
851
|
|
Tax benefit from stock compensation realization
|
|
|
376
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from financing activities
|
|
|
8,877
|
|
|
|
56,925
|
|
Effects of exchange rate changes
|
|
|
287
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(6,643
|
)
|
|
|
3,828
|
|
Cash and cash equivalents at beginning of period
|
|
|
16,104
|
|
|
|
12,253
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
9,461
|
|
|
$
|
16,081
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
Notes to
Consolidated Financial Statements
(Unaudited)
Note A
Accounting Policies
In managements opinion, the accompanying consolidated
financial statements contain all adjustments necessary to
present fairly the financial position as of July 1, 2011
and December 31, 2010 and the results of operations for the
second quarter and first half ended July 1, 2011 and
July 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.
Note B
Inventories
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
Dec. 31,
|
|
(Thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
Principally average cost:
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
57,934
|
|
|
$
|
43,295
|
|
Work in process
|
|
|
155,585
|
|
|
|
159,081
|
|
Finished goods
|
|
|
59,615
|
|
|
|
32,991
|
|
|
|
|
|
|
|
|
|
|
Gross inventories
|
|
|
273,134
|
|
|
|
235,367
|
|
Excess of average cost over LIFO inventory value
|
|
|
90,745
|
|
|
|
80,900
|
|
|
|
|
|
|
|
|
|
|
Net inventories
|
|
$
|
182,389
|
|
|
$
|
154,467
|
|
|
|
|
|
|
|
|
|
|
Note C
Pensions and Other Post-employment Benefits
The following is a summary of the second quarter and first half
2011 and 2010 net periodic benefit cost for the domestic
defined benefit pension plan and the domestic retiree medical
plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Second Quarter Ended
|
|
|
Second Quarter Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(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
|
|
|
|
434
|
|
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
|
|
|
$
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
First Half Ended
|
|
|
First Half Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(Thousands)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
3,033
|
|
|
$
|
2,488
|
|
|
$
|
142
|
|
|
$
|
136
|
|
Interest cost
|
|
|
4,618
|
|
|
|
4,312
|
|
|
|
798
|
|
|
|
869
|
|
Expected return on plan assets
|
|
|
(5,370
|
)
|
|
|
(5,072
|
)
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(236
|
)
|
|
|
(265
|
)
|
|
|
(18
|
)
|
|
|
(18
|
)
|
Amortization of net loss
|
|
|
1,963
|
|
|
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
4,008
|
|
|
$
|
2,885
|
|
|
$
|
922
|
|
|
$
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
The Company made contributions to the domestic defined benefit
pension plan of $3.6 million in the first half 2011.
Note D
Contingencies
Materion Brush Inc. (formerly known as Brush Wellman Inc.), one
of the Companys wholly owned subsidiaries, has been 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 half of 2011, one case was dismissed while the
other case was settled for an amount less than
$0.1 million. There were no new CBD cases files during the
first half of 2011 and no cases were outstanding as of the end
of the second quarter 2011.
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
July 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 second quarter and first half ended July 1, 2011
and July 2, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(Thousands)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Net income
|
|
$
|
13,872
|
|
|
$
|
13,719
|
|
|
$
|
25,690
|
|
|
$
|
20,440
|
|
Cumulative translation adjustment
|
|
|
757
|
|
|
|
(440
|
)
|
|
|
2,068
|
|
|
|
(1,346
|
)
|
Change in the fair value of derivative financial instruments,
net of tax
|
|
|
(211
|
)
|
|
|
(85
|
)
|
|
|
(411
|
)
|
|
|
447
|
|
Pension and other retirement plan liability adjustments, net of
tax
|
|
|
560
|
|
|
|
373
|
|
|
|
1,120
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
14,978
|
|
|
$
|
13,567
|
|
|
$
|
28,467
|
|
|
$
|
20,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
6
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
|
|
|
(Thousands)
|
|
Technologies
|
|
Alloys
|
|
Composites
|
|
Materials
|
|
Subtotal
|
|
Other
|
|
Total
|
|
|
Second Quarter 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
287,299
|
|
|
$
|
96,636
|
|
|
$
|
17,729
|
|
|
$
|
22,954
|
|
|
$
|
424,618
|
|
|
$
|
92
|
|
|
$
|
424,710
|
|
Intersegment sales
|
|
|
843
|
|
|
|
993
|
|
|
|
32
|
|
|
|
387
|
|
|
|
2,255
|
|
|
|
|
|
|
|
2,255
|
|
Operating profit (loss)
|
|
|
10,664
|
|
|
|
9,453
|
|
|
|
1,106
|
|
|
|
2,366
|
|
|
|
23,589
|
|
|
|
(2,744
|
)
|
|
|
20,845
|
|
Second Quarter 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
213,897
|
|
|
$
|
77,852
|
|
|
$
|
15,738
|
|
|
$
|
18,413
|
|
|
$
|
325,900
|
|
|
$
|
46
|
|
|
$
|
325,946
|
|
Intersegment sales
|
|
|
467
|
|
|
|
2,935
|
|
|
|
144
|
|
|
|
919
|
|
|
|
4,465
|
|
|
|
|
|
|
|
4,465
|
|
Operating profit (loss)
|
|
|
9,246
|
|
|
|
8,510
|
|
|
|
2,074
|
|
|
|
2,033
|
|
|
|
21,863
|
|
|
|
(1,365
|
)
|
|
|
20,498
|
|
First Half 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
543,925
|
|
|
$
|
181,085
|
|
|
$
|
31,687
|
|
|
$
|
42,615
|
|
|
$
|
799,312
|
|
|
$
|
203
|
|
|
$
|
799,515
|
|
Intersegment sales
|
|
|
1,524
|
|
|
|
1,903
|
|
|
|
222
|
|
|
|
705
|
|
|
|
4,354
|
|
|
|
|
|
|
|
4,354
|
|
Operating profit (loss)
|
|
|
21,373
|
|
|
|
18,218
|
|
|
|
1,192
|
|
|
|
4,523
|
|
|
|
45,306
|
|
|
|
(6,384
|
)
|
|
|
38,922
|
|
Assets
|
|
|
331,673
|
|
|
|
248,582
|
|
|
|
123,800
|
|
|
|
27,554
|
|
|
|
731,609
|
|
|
|
35,105
|
|
|
|
766,714
|
|
First Half 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers
|
|
$
|
416,907
|
|
|
$
|
141,240
|
|
|
$
|
28,833
|
|
|
$
|
33,875
|
|
|
$
|
620,855
|
|
|
$
|
173
|
|
|
$
|
621,028
|
|
Intersegment sales
|
|
|
861
|
|
|
|
6,684
|
|
|
|
177
|
|
|
|
1,311
|
|
|
|
9,033
|
|
|
|
|
|
|
|
9,033
|
|
Operating profit (loss)
|
|
|
17,711
|
|
|
|
11,838
|
|
|
|
4,231
|
|
|
|
3,074
|
|
|
|
36,854
|
|
|
|
(3,151
|
)
|
|
|
33,703
|
|
Assets
|
|
|
330,712
|
|
|
|
219,739
|
|
|
|
99,135
|
|
|
|
25,569
|
|
|
|
675,155
|
|
|
|
40,313
|
|
|
|
715,468
|
|
Note G
Stock-based Compensation Expense
The Company granted approximately 13,000 shares of
restricted stock to its non-employee directors in the second
quarter 2011 at a fair market value of $39.30 per share. The
fair value was determined using the closing price of the
Companys stock on the grant date and will be amortized
over the vesting period of one year.
The Company granted approximately 78,000 shares of
restricted stock to certain employees in the second quarter 2011
at a fair value of $39.30 per share. Another 5,000 shares
of restricted stock was granted to an employee in the second
quarter 2011 at a fair value of $36.97 per share. The fair value
was determined using the closing price of the Companys
stock on the grant date and will be amortized over the vesting
period of three years. The holders of the restricted stock will
forfeit their shares should their employment be terminated prior
to the end of the vesting period.
The Company granted approximately 148,000 stock appreciation
rights (SARs) to certain employees in the second quarter 2011 at
a strike price of $39.30 per share. The fair value of the SARs,
which was determined on the grant date using a Black-Scholes
model, was $21.47 per share and will be amortized over the
vesting period of three years. The SARs expire ten years from
the date of the grant.
Total stock-based compensation expense for the above and
previously existing awards and plans was $1.2 million in
the second quarter 2011 and $1.0 million in the second
quarter 2010. For the first half of the year, the stock-based
compensation expense was $2.2 million in 2011 and
$2.0 million in 2010.
The Company received $0.7 million for the exercise of
approximately 50,000 shares in the first half of 2011 and
$0.9 million for the exercise of approximately
47,000 shares in the first half of 2010. Approximately
7,000 stock appreciation rights were exercised in the first half
of 2011 as well.
7
Note H
Other-net
Other-net
expense for the second quarter and first half 2011 and 2010 is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(Thousands)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Exchange/translation gain (loss)
|
|
$
|
(674
|
)
|
|
$
|
246
|
|
|
$
|
(1,019
|
)
|
|
$
|
(307
|
)
|
Amortization of intangible assets
|
|
|
(1,509
|
)
|
|
|
(1,555
|
)
|
|
|
(3,019
|
)
|
|
|
(3,051
|
)
|
Metal consignment fees
|
|
|
(2,670
|
)
|
|
|
(1,265
|
)
|
|
|
(4,799
|
)
|
|
|
(2,440
|
)
|
Derivative ineffectiveness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(489
|
)
|
Other items
|
|
|
(211
|
)
|
|
|
(372
|
)
|
|
|
102
|
|
|
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,064
|
)
|
|
$
|
(2,946
|
)
|
|
$
|
(8,735
|
)
|
|
$
|
(7,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note I
Income Taxes
The tax expense of $6.4 million in the second quarter 2011
was calculated by applying a rate of 31.4% against income before
income taxes while the tax expense of $6.1 million in the
second quarter 2010 was calculated by applying a rate of 30.7%
against the income before income taxes in that period. In the
first half of 2011, the tax expense of $12.0 million was
calculated by applying a rate of 31.9% against income before
income taxes. In the first half of 2010, a rate of 36.9% was
applied against income before income taxes to calculate the
expense of $12.0 million.
The differences between the statutory and effective rates in the
second quarter and first half of 2011 and 2010 were due to the
impact of the production deduction, percentage depletion,
foreign source income and deductions, executive compensation,
state and local taxes and other factors.
In addition, the tax expense in the first half of 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.
The tax rate in the second quarter and first half of 2011 was
affected by immaterial discrete events.
The effective tax rate was lower in the second quarter 2011 than
the first quarter 2011 prior to the impact of any discrete
events. This change in the tax rate did not have a material
impact on net income or earnings per share in the second 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.
8
The following table summarizes the financial instruments
measured at fair value in the Consolidated Balance Sheet as of
July 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(Thousands)
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors deferred compensation investments
|
|
$
|
642
|
|
|
$
|
642
|
|
|
$
|
|
|
|
$
|
|
|
Foreign currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
642
|
|
|
$
|
642
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors deferred compensation liability
|
|
$
|
(642
|
)
|
|
$
|
642
|
|
|
$
|
|
|
|
$
|
|
|
Foreign currency forward contracts
|
|
|
(2,176
|
)
|
|
|
|
|
|
|
(2,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,818
|
)
|
|
$
|
642
|
|
|
$
|
(2,176
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 July 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.
9
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 $36.5 million as of July 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 July 1,
2011 as follows (dollars in thousands):
|
|
|
|
|
|
|
Fair
|
|
Debit (credit)
|
|
Value
|
|
|
|
|
Other liabilities and accrued items
|
|
$
|
(2,059
|
)
|
Other long-term liabilities
|
|
|
(117
|
)
|
|
|
|
|
|
Total
|
|
$
|
(2,176
|
)
|
|
|
|
|
|
10
A summary of the hedging relationships of the outstanding
derivative financial instruments designated as cash flow hedges
as of July 1, 2011 and July 2, 2010 and the amounts
transferred into income for the second quarter and first half
then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(Thousands)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Derivative in cash flow hedging relationship
|
|
|
Foreign Currency
|
|
|
|
Foreign Currency
|
|
|
|
Foreign Currency
|
|
|
|
Foreign Currency
|
|
|
|
|
Forward Contracts
|
|
|
|
Forward Contracts
|
|
|
|
Forward Contracts
|
|
|
|
Forward Contracts
|
|
Effective portion of hedge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in OCI at the end of the period
|
|
$
|
(2,176
|
)
|
|
$
|
803
|
|
|
|
|
|
|
|
|
|
Location of gain (loss) reclassified from OCI into income
|
|
|
Other-net
|
|
|
|
Other-net
|
|
|
|
Other-net
|
|
|
|
Other-net
|
|
Amount of gain (loss) reclassified from OCI into income
|
|
$
|
(625
|
)
|
|
$
|
398
|
|
|
$
|
(1,235
|
)
|
|
$
|
388
|
|
Ineffective portion of hedge and amounts excluded from
effectiveness testing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of gain (loss) recognized in income on derivative
|
|
|
Other-net
|
|
|
|
Other-net
|
|
|
|
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 period as
incurred. 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 zero in the second quarter 2010 and a net
$0.5 million expense in the first half of 2010 and was
recorded in
other-net on
the Consolidated Statements of Income. The forward contract and
the embedded copper derivative outstanding at the end of the
second quarter 2010 matured in the third quarter of 2010. There
was no derivative ineffectiveness recorded in the second quarter
or first half of 2011.
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 $2.1 million from OCI and
charge
other-net on
the Consolidated Statements of Income in the twelve month period
beginning July 2, 2011.
11
|
|
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 $424.7 million in the second quarter 2011
established a record high, surpassing the prior record set in
the first quarter 2011 by 13%. We have established new quarterly
sales records in five of the most recent six quarters. Sales in
the second quarter 2011 were also 30% higher than sales in the
second quarter 2010.
The sales growth in the second quarter 2011 was due to a
combination of improved demand from a number of markets
(particularly automotive electronics, industrial components and
commercial aerospace, medical and energy), higher metal
pass-through prices and pricing initiatives.
Gross margin of $62.7 million in the second quarter 2011
was a $6.8 million improvement over the second quarter
2010, as a portion of the margin benefits from the higher sales
volume and improved pricing was offset by
start-up
costs associated with the new beryllium facility, higher
manufacturing overhead costs and other factors.
Various expenses were higher in the second quarter 2011 compared
to the second quarter 2010, including the legal and marketing
costs associated with the renaming of the company, metal
consignment fees (partially due to the increased market prices
of precious metals), retirement plan expenses (driven by the
lower discount rate and other factors) and other items.
Operating profit was a solid $20.8 million in the second
quarter 2011, a slight improvement over the operating profit of
$20.5 million in the second quarter 2010. Earnings per
share of $0.67 was unchanged between quarters.
During the second quarter 2011, we entered into a new
$8.0 million long-term debt facility that is designed to
finance capital expenditures in the state of Ohio. Subsequent to
the end of the second quarter, we negotiated a new five-year
revolving credit agreement that provides increased borrowing
capacity and more flexible terms than the former agreement.
We finalized the settlement of a chronic beryllium disease case
early in the second quarter 2011 for an immaterial amount. As a
result, we do not have any chronic beryllium disease litigation
pending against us as of the end of the second quarter 2011.
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(Millions, except per share data)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Sales
|
|
$
|
424.7
|
|
|
$
|
325.9
|
|
|
$
|
799.5
|
|
|
$
|
621.0
|
|
Operating profit
|
|
|
20.8
|
|
|
|
20.5
|
|
|
|
38.9
|
|
|
|
33.7
|
|
Income before income taxes
|
|
|
20.2
|
|
|
|
19.8
|
|
|
|
37.7
|
|
|
|
32.4
|
|
Net income
|
|
|
13.9
|
|
|
|
13.7
|
|
|
|
25.7
|
|
|
|
20.4
|
|
Diluted earnings per share
|
|
$
|
0.67
|
|
|
$
|
0.67
|
|
|
$
|
1.23
|
|
|
$
|
1.00
|
|
Sales were $424.7 million in the second
quarter 2011, an improvement of $98.8 million, or 30%, over
sales of $325.9 million in the second quarter 2010. For the
first six months of the year, sales grew 29% from
$621.0 million in 2010 to $799.5 million in 2011.
Sales have improved over the corresponding quarter in the prior
year for seven consecutive quarters.
Sales to a number of markets were higher in the second quarter
2011 than the second quarter 2010. However, shipments to the
consumer electronics market, our largest market, were
relatively unchanged in the second quarter
12
2011 from the second quarter 2010 after having grown
significantly over the prior five quarters. Defense and
science shipments were also relatively unchanged between
periods.
Sales to the industrial components and commercial aerospace
market grew at a double-digit rate in the second quarter
2011 over the second quarter 2010.
Automotive electronics market sales were approximately
30% higher in the second quarter 2011 than the second quarter
2010 due to continued strong demand from domestic and foreign
customers.
Sales to the telecommunications infrastructure market,
one of our smaller markets, grew approximately 20% in the second
quarter 2011 over the second quarter 2010 on the strength of
shipments for undersea applications.
Sales to the energy, medical and other markets also
contributed to the sales growth in the second quarter 2011 over
the second quarter 2010.
Total sales order entry, while slightly higher than the first
quarter 2011, was approximately 5% lower than sales in the
second quarter 2011. Order entry had exceeded sales for the
prior seven consecutive quarters. Order entry in the second
quarter and first half of 2011 was higher than the comparable
periods of 2010.
Sales also grew in the second quarter 2011 and the first half of
2011 over the respective periods in the prior year due to the
pass-through of higher metal prices. We use gold, silver,
platinum, palladium, copper and ruthenium in the manufacture of
various products. Our sales are affected by the prices for these
metals, as changes in our purchase prices are passed on to our
customers in the form of higher or lower selling prices. The net
average prices between periods for these metals increased during
the second quarter and first half of 2011 over the respective
periods in 2010. The net impact of the change in metal prices
was an estimated $63.0 million increase in sales in the
second quarter 2011 from the second quarter 2010 and an
estimated $107.5 million increase in sales in the first
half of 2011 from the first half of 2010.
Domestic sales improved 35% in the second quarter 2011 and 34%
in the first half of 2011 over the comparable periods in 2010.
Domestic sales include the majority of the increase in the metal
price pass-through. International sales grew 19% in the second
quarter 2011 and 15% in the first half of 2011 over the same
periods in 2010. International sales were 26% of total sales in
the first half of 2011 and 29% of total sales in the first half
of 2010. European sales grew 35% in the first half of 2011 and
accounted for the majority of the international sales growth
during that time period. Sales to Asia grew 4% in the first half
of 2011 over the first half of 2010.
Gross margin was $62.7 million, or 15% of
sales, in the second quarter 2011 compared to
$55.9 million, or 17% of sales, in the second quarter 2010.
For the first six months of 2011, gross margin was
$118.5 million, an improvement of $13.3 million from
the $105.2 million of margin generated in the first half of
2010. Gross margin was 15% of sales in the first half of 2011
and 17% of sales in the first half of 2010.
Gross margin in the second quarter and first half of 2011
benefitted from higher sales volumes, higher selling prices in
portions of our business and improved operating efficiencies and
machine utilization due to the higher production volumes. The
change in product mix, which had been favorable in the first
quarter 2011, had an immaterial impact on the second quarter
2011 margins. 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 in the second
quarter and first half of 2011 by higher costs and
inefficiencies associated with the
start-up of
the new beryllium facility. While the major pieces of equipment
were in place, we incurred additional costs for testing the
equipment and bringing it up on line. Higher scrap rates on
certain nickel products also reduced margins in the first half
of 2011.
Manufacturing overhead costs were only 1% higher in the second
quarter 2011 than the second quarter 2010 but 7% higher in the
first half of 2011 than the first half of 2010. The increase in
overhead costs in the first half of 2011 was due to the cost of
investments to support the current and projected growth in the
business, ongoing support costs for the new beryllium facility
and other factors offset in part by various cost savings.
13
We recorded a $1.4 million benefit as the estimated margin
impact of the projected depletion of a
last-in,
first out (LIFO) inventory layer associated with the second
quarter 2010. We also recorded a $1.6 million LIFO benefit
in the first quarter 2010. There was no corresponding benefit
recorded in the second quarter or first half of 2011.
Selling, general and administrative (SG&A) expenses
totaled $34.0 million in the second quarter 2011,
an increase of $3.4 million over the total expense of
$30.6 million in the second quarter 2010. SG&A
expenses in the first six months of 2011 were
$65.7 million, or 8% of sales, compared to
$61.0 million, or 10% of sales, in the first six months of
2010.
Legal, administrative and marketing costs associated with
changing the companys name totaled $1.1 million in
the second quarter 2011 and $2.7 million in the first half
of 2011. We anticipate that we will incur additional expenses
for this program in the second half of 2011, but not to the same
extent as in the first half of the year.
Incentive compensation expense under cash-based plans was
$0.2 million lower in the second quarter 2011 than the
second quarter 2010 and $1.4 million lower in the first
half of 2011 than the first half of 2010 due to differences in
the levels of projected profitability relative to the plan
targets.
Stock-based compensation expense was $0.2 million higher in
the second quarter and first half of 2011 than the comparable
periods in 2010.
The expense under the domestic defined benefit pension plan was
$0.6 million higher in the second quarter 2011 than the
second quarter 2010 and $1.1 million higher in the first
half of 2011 than the first half of 2010. The increased cost was
due to a change in the discount rate, the performance of the
plan assets and other actuarial and demographic factors. The
cost increase was divided primarily between SG&A expense
and cost of sales. Other fringe benefit costs, including costs
associated with the 401(k) savings plan, were higher in the
second quarter 2011 than the second quarter 2010.
Corporate expenses, including various legal compliance and
related costs, information technology costs and the costs of
other initiatives designed to improve long-term efficiencies and
profitability, were higher in the second quarter and first half
of 2011 than the corresponding periods in 2010.
Various sales-related expenses increased with the higher sales
volume in the first half of 2011 as well.
Research and development (R&D) expenses were
$2.7 million in the second quarter 2011 compared to
$1.8 million in the second quarter 2010. R&D expenses
of $5.1 million in the first half of 2011 were
$1.6 million higher than the expense of $3.5 million
in the first half of 2010. R&D activities have increased in
the first half of 2011 in order to help support our growth
opportunities.
Other-net
expense was $5.1 million in the second quarter 2011
compared to $2.9 million for the second quarter 2010. For
this first half of the year,
other-net
expense totaled $8.7 million in 2011 and $7.0 million in
2010. See Note H to the Consolidated Financial Statements
for the details of the major components of
other-net
expense.
The metal consignment fee was $1.4 million higher in the
second quarter 2011 and $2.4 million higher in the first
half of 2011 than the respective periods in 2010 largely due to
the increased value of the precious metal on hand. The
additional copper pounds held under consignment in 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 amortization of intangible assets of $1.5 million in
the second quarter 2011 and $3.0 million in the first half
of 2011 were relatively unchanged from the respective periods in
the prior year.
The derivative ineffectiveness expense of $0.5 million in
the first half of 2010 resulted from movements in the fair
values of copper derivatives that did not qualify for hedge
accounting. These instruments matured in 2010 and there was no
ineffectiveness associated with the outstanding derivatives in
the first half of 2011.
Other-net
also includes bad debt expense, gains and losses on the disposal
of fixed assets, cash discounts and other miscellaneous items.
14
Operating profit was $20.8 million in the
second quarter 2011 compared to $20.5 million in the second
quarter 2010 as the margin benefits from the higher sales
volumes and other factors were predominately offset by the
start-up
costs of the new beryllium facility, the costs associated with
the company name change, higher retirement benefit plan costs,
differences in the LIFO inventory benefit and other items.
Operating profit was $38.9 million in the first half of
2011, an improvement of $5.2 million over the operating
profit of $33.7 million in the first half of 2010.
Interest expense net of
$0.6 million in the second quarter 2011 was down slightly
from the net expense of $0.7 million in the second quarter
2010. For the first half of the year, interest
expense-net
was $1.2 million in 2011 and $1.3 million in 2010.
Average debt levels were slightly lower in the second quarter
2011 than the second quarter 2010 and the average effective
borrowing rate was lower by a minor amount. Interest on capital
leases was higher in the second quarter and first half of 2011
than the corresponding periods of 2010.
The income before income taxes and the
income tax expense for the second quarter and first half
of 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
|
First Half Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 1,
|
|
|
July 2,
|
|
(Dollars in millions)
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
Income before income taxes
|
|
$
|
20.2
|
|
|
$
|
19.8
|
|
|
$
|
37.7
|
|
|
$
|
32.4
|
|
Income tax expense
|
|
|
6.4
|
|
|
|
6.1
|
|
|
|
12.0
|
|
|
|
12.0
|
|
Effective tax rate
|
|
|
31.4
|
%
|
|
|
30.7
|
%
|
|
|
31.9
|
%
|
|
|
36.9
|
%
|
The effects of the production deduction, percentage depletion,
executive compensation, foreign source income and deductions and
other items were major factors for the difference between the
effective and statutory rates in the second quarter and first
half of 2011 and 2010.
The tax expense of $12.0 million in the first six months of
2010 also included a discrete item of $1.4 million recorded
in the first quarter 2010 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 tax asset be adjusted in the period
in which legislation changing the applicable tax law is enacted.
There were no material discrete events recorded in the second
quarter or first half of 2011.
Net income was $13.9 million (or $0.67 per
share, diluted) in the second quarter 2011 compared to net
income of 13.7 million (or $0.67 per share, diluted) in the
second quarter 2010. For the first half of 2011, net income was
$25.7 million (or $1.23 per share, diluted) versus net
income of $20.4 million (or $1.00 per share, diluted) in
the first half of 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.
15
The operating loss within All Other was $1.4 million higher
in the second quarter 2011 than the second quarter 2010 and
$3.2 million higher in the first half of 2011 than the
first half of 2010. The increased loss in the quarter and first
half of the year was due to a combination of costs associated
with the company name change in 2011, higher legal compliance
costs, increased wages and other items offset in part by lower
incentive compensation. The comparison for the first half of the
year was also affected by the $0.5 million of derivative
ineffectiveness recorded in the first quarter 2010.
Advanced
Material Technologies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
First Half Ended
|
|
|
July 1,
|
|
July 2,
|
|
July 1,
|
|
July 2,
|
(Millions)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
Sales
|
|
$
|
287.3
|
|
|
$
|
213.9
|
|
|
$
|
543.9
|
|
|
$
|
416.9
|
|
Operating profit
|
|
|
10.7
|
|
|
|
9.2
|
|
|
|
21.4
|
|
|
|
17.7
|
|
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 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 of $287.3 million
in the second quarter 2011 were 34% higher than sales of
$213.9 million in the second quarter 2010, while sales of
$543.9 million in the first half of 2011 were
$127.0 million, or 30%, higher than sales of
$416.9 million in the first half of 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 second quarter and
first half of 2011 than the respective periods in 2010. The
higher metal price pass-through increased sales by an estimated
$57.7 million in the second quarter 2011 and
$97.9 million in the first half of 2011.
Sales of products manufactured at the Buffalo, New York
facility, including targets, lids and wire, were relatively
unchanged in the second quarter 2011 from the second quarter
2010 after adjusting for changes in the metal prices. The order
entry level, after growing for a number of periods, started to
slow down in the second quarter 2011. Sales of these products
were higher in the first half of 2011 over the first half of
2010 with that growth due to the increased demand for wireless,
handset, semiconductor and other microelectronic applications
from the consumer electronics and defense markets.
Sales from the Albuquerque, New Mexico facility, which was
acquired in the first quarter 2010, showed significant growth in
the second quarter 2011 as sales for architectural glass
applications within the energy market and sales of other
products to the industrial components market improved. This
growth was also partially in jewelry and other miscellaneous
forms that typically generate lower margins.
Refining revenue increased in the second quarter and first half
of 2011 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, after showing
modest improvement in the first quarter 2011, slowed down in the
second quarter 2011.
Sales of microelectronic packages, one of this segments
smaller product offerings, declined in the second quarter and
first half of 2011 from very high levels in the comparable
periods in 2010. This decline was expected due to changes in
technology within the telecommunications infrastructure market.
16
Advanced chemical sales grew at double-digit rates in the second
quarter and first half of 2011 over the respective periods in
the prior year largely due to growth from traditional
applications, including semiconductors and security. These
materials are also used in LED, solar energy and other
applications. The order entry rate for advanced chemical
products remained solid throughout the first half of 2011.
Sales of large area specialty coatings, primarily precious metal
coated polymer films, showed solid improvement in the second
quarter 2011 and first half of 2011 over the corresponding
periods in the prior year. The growth was largely due to
improved sales to the medical market. We continued to develop
new applications for these materials in the medical, energy and
other markets.
Precision optic sales improved in the second quarter 2011 over
the second quarter 2010 but were slightly lower in the first
half of 2011 than the first half of 2010. These products are
sold into the medical, defense and science and other markets.
Demand for traditional science and deep space applications
softened in the first half of 2011 partially due to reductions
and delays in government funding.
The order entry rate was essentially equal to sales during the
first half of 2011 for this segment.
The gross margin on sales by Advanced Material Technologies was
$31.4 million (11% of sales) in the second quarter 2011
versus $27.4 million (13% of sales) in the second quarter
2010. Gross margin of $60.5 million in the first half of
2011 was a $6.0 million improvement over the gross margin
of $54.5 million generated in the first half of 2010. The
gross margin was 11% of sales in the first half of 2011 and 13%
of sales in the first half of 2010.
The growth in the margin dollars in the second quarter 2011 and
the first half of 2011 was predominately due to the net higher
sales volumes. The change in product mix was slightly favorable
in the second quarter 2011 but was slightly unfavorable in the
first half of 2011. For the first half of the year,
manufacturing overhead costs were $1.7 million higher in
2011 than 2010. The increase in these costs was partially due to
the higher production volumes. Gross margin as a percent of
sales was lower in the second quarter and first half of 2011
than the comparable periods in 2010 partially as a result of the
increased metal price pass-through in sales.
SG&A, R&D and
other-net
expenses for this segment were $20.7 million in the second
quarter 2011 (7% of sales) compared to $18.1 million (8% of
sales) in the second quarter 2010. These expenses totaled
$39.1 million (7% of sales) in the first half of 2011, an
increase of $2.3 million from expenses of
$36.8 million (9% of sales) in the first half of 2010.
A significant portion of the higher expenses is due to the
precious metal consignment fee. These fees were
$1.1 million higher in the second quarter and
$1.7 million higher in the first half of 2011 than the
respective periods of 2010 mainly due to the increased value of
metal on hand. R&D expenses increased throughout 2011 due
to higher activity levels. Corporate charges and incentive
compensation expense, after being relatively unchanged in the
first quarter 2011 compared to the first quarter 2010, increased
in the second quarter 2011 over the second quarter 2010.
Operating profit from Advanced Material Technologies was
$10.7 million in the second quarter 2011 compared to
$9.2 million in the second quarter 2010. Operating profit
was $21.4 million in the first half of 2011, an improvement
of $3.7 million over the operating profit of
$17.7 million in the first half of 2010. Operating profit
was 4% of sales in the first half of 2011 and 2010.
Performance
Alloys
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
First Half Ended
|
|
|
July 1,
|
|
July 2,
|
|
July 1,
|
|
July 2,
|
(Millions)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
Sales
|
|
$
|
96.6
|
|
|
$
|
77.9
|
|
|
$
|
181.1
|
|
|
$
|
141.2
|
|
Operating profit
|
|
|
9.5
|
|
|
|
8.5
|
|
|
|
18.2
|
|
|
|
11.8
|
|
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;
17
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 of $96.6 million in the second
quarter 2011 were a 24% improvement over sales of
$77.9 million in the second quarter 2010. Sales of
$181.1 million in the first half of 2011 were
$39.9 million, or 28%, higher than sales of
$141.2 million in the first six months of 2010.
Sales of both strip and bulk products improved in the second
quarter and first half of 2011 over the levels in the respective
periods of 2010.
Sales to the automotive electronics and industrial components
and commercial aerospace markets grew at double-digit rates in
the second quarter and first half of 2011 over the comparable
periods in 2010. Sales to the telecommunications infrastructure
market, including undersea applications, also have grown at
double-digit rates in the first half of 2011 over the first half
of 2010. Sales to the appliance market were relatively flat in
the first half of 2011 versus the first half of 2010.
Sales to the consumer electronics market declined by a modest
amount in the second quarter 2011 over the second quarter 2010
and were approximately 4% higher in the first half of 2011 than
the first half of 2010. The growth in the first half of the year
was fueled in part by solid demand for our strip materials in
smart phones and other hand held devices.
Shipments of strip products were 4% higher in the second quarter
2011 than the second quarter 2010 and 3% higher in the first
half of 2011 than the first half of 2010. Shipments of thin
diameter rod and wire have been strong during the first half of
2011, while the higher beryllium-containing strip products
improved during the second quarter 2011 over the second quarter
2010 and first quarter 2011.
Shipments of bulk products grew 13% in the second quarter 2011
over the second quarter 2010 after growing 19% in the first
quarter 2011 over the first quarter 2010. The
non-beryllium-containing bulk products have grown at
double-digit rates in the first half of 2011 over the first half
of 2010.
Beryllium hydroxide sales totaled $3.3 million in the
second quarter and $4.5 million in the first half of 2011.
Sales of beryllium hydroxide were $4.2 million in the first
half of 2010, all of which occurred in the second quarter of
that year.
The pass-through of higher metal prices accounted for an
estimated $5.3 million of the $18.7 million difference
in sales between the second quarter 2011 and the second quarter
2010 and $9.2 million of the $39.9 million difference
in sales between the first six months of 2011 and the first six
months of 2010.
The order entry rate for Performance Alloys slowed down in the
second quarter 2011 from the very high level in the first
quarter 2011 and was lower than sales by approximately 17% in
the second quarter. Part of this slowdown may be due to an
inventory correction in the consumer electronics market.
The gross margin on sales from Performance Alloys was
$22.2 million (23% of sales) in the second quarter 2011
compared to $19.5 million (25% of sales) in the second
quarter 2010. The gross margin was $41.5 million in the
first half of 2011, an improvement of $6.9 million over the
gross margin of $34.6 million generated in the first half
of 2010. Gross margin was 23% of sales in the first half of 2011
and 25% of sales in the first half of 2010.
The growth in the gross margin dollars in the second quarter and
first half of 2011 over the respective periods of 2010 was
mainly due to the higher sales and production volumes. Pricing
changes have also contributed to the margin improvement while
the change in product mix was favorable in both the second
quarter and first half of 2011. These margin benefits were
partially offset by lower yields and higher scrap rates on
nickel-containing
18
products in the first half of 2011. Improvements were made in
the second quarter 2011, but the yield rates remained lower than
historical levels. The lower yields negatively impacted costs,
but did not affect sales.
The previously discussed LIFO inventory benefit of
$1.4 million in the second quarter and $3.0 million
for the first half of 2010 were recorded against Performance
Alloys gross margin. No similar benefit was recorded in
the second quarter and first half of 2011.
Total SG&A, R&D and
other-net
expenses were $12.7 million (13% of sales) in the second
quarter 2011 versus $11.0 million (14% of sales) in the
second quarter 2010. For the first half of 2011, these expenses
totaled $23.3 million (13% of sales) compared to
$22.8 million (16% of sales) in the first half of 2010.
Differences in foreign currency exchange gains and losses
accounted for the majority of the difference in the expense
levels in the second quarter and first half of 2011 and the
comparable periods in 2010. R&D spending grew throughout
the first half of 2011 as well. Incentive compensation was
slightly higher in the second quarter 2011 than the second
quarter 2010, but was $0.7 million lower in the first half
of 2011 than it was in the first half of 2010 due to differences
in actual performance versus the plan targets.
Performance Alloys generated an operating profit of
$9.5 million in the second quarter 2011 compared to
$8.5 million in the second quarter 2010. Operating profit
improved from $11.8 million in the first half of 2010 to
$18.2 million in the first half of 2011. The
$6.4 million improvement was due to the margin benefit from
the higher sales volume and improved pricing offset in part by
the lower yields on nickel products and the increase in
expenses. Operating profit was 10% of sales in the first half of
2011 and 8% of sales in the first half of 2010.
Beryllium
and Composites
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
First Half Ended
|
|
|
July 1,
|
|
July 2,
|
|
July 1,
|
|
July 2,
|
(Millions)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
Sales
|
|
$
|
17.7
|
|
|
$
|
15.7
|
|
|
$
|
31.7
|
|
|
$
|
28.8
|
|
Operating profit
|
|
|
1.1
|
|
|
|
2.1
|
|
|
|
1.2
|
|
|
|
4.2
|
|
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.
Sales by Beryllium and Composites were $17.7 million in the
second quarter 2011 versus $15.7 million in the second
quarter 2010. Sales of $31.7 million in the first half of
2011 were 10% higher than sales of $28.8 million in the
first half of 2010.
The majority of the sales growth in the second quarter and first
half of the year was due to higher shipments to the industrial
components market, including non-medical x-ray window
applications, from the Fremont facility. Sales in the second
quarter 2011 for traditional applications within the defense and
science market, while up approximately 40% over the first
quarter 2011, were still 4% below the second quarter 2010. Sales
of beryllia ceramics to the telecommunications infrastructure
market improved by minor amounts in the second quarter and first
half of 2011 versus the comparable periods in 2010. Sales to the
medical market in the first half of 2011 were relatively
unchanged from the first half of 2010.
The order entry rate in the second quarter 2011, while higher
than the second quarter 2010 and the first quarter 2011, was
still below the level of sales in the second quarter 2011.
Beryllium and Composites generated a gross margin of
$4.4 million (25% of sales) in the second quarter 2011 and
$5.1 million (33% of sales) in the second quarter 2010.
Segment gross margin of $7.5 million in the first half of
2011 was $1.9 million lower than the gross margin of
$9.4 million in the first half of 2010. Gross margin was
24% of sales in the first half of 2011 and 33% of sales in the
first half of 2010.
Gross margin was reduced approximately $1.1 million in the
second quarter 2011 and $2.2 million in the first half of
2011 as a result of additional costs and inefficiencies
associated with the
start-up of
the new beryllium
19
facility at the Elmore plant site. Major construction of the
facility has been completed, but 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. The plant is designed to produce pure beryllium
metal from beryllium hydroxide and it did produce a small,
non-production level quantity of pure beryllium during the
second quarter. Once operational, the facility will reduce the
need to purchase pure beryllium metal from outside suppliers.
The change in product mix was unfavorable in the second quarter
and first half of 2011 from the respective periods in the prior
year as the products sold in 2011 generated lower contribution
margins.
Manufacturing overhead costs were higher in the second quarter
and first half of 2011 than the respective periods in 2010,
partially due to ongoing normal support costs for the new
facility.
Lower manufacturing yields on welded products also negatively
impacted gross margin in the second quarter 2010. However,
process improvements were implemented and yields improved in the
second quarter 2010 over the first quarter 2010.
SG&A, R&D and
other-net
expenses for Beryllium and Composites totaled $3.3 million
in the second quarter 2011 compared to $3.1 million in the
second quarter 2010. For the first half of the year, expenses
totaled $6.3 million (20% of sales) in 2011 and
$5.1 million (18% of sales) in 2010.
R&D expenses were higher in the second quarter and first
half of 2011 than the corresponding periods of 2010 due to
increased activity. Corporate charges were also higher while
incentive compensation expense was lower in the second quarter
and first half of 2011. Differences in other non-operating items
contributed to the higher expense level in the first half of
2011.
Operating profit for Beryllium and Composites was
$1.1 million in the second quarter 2011, a decline of
$1.0 million from the $2.1 million operating profit
earned in the second quarter 2010. For the first half of the
year, operating profit was $1.2 million in 2011 and
$4.2 million in 2010. Operating profit was 4% of sales in
the first half of 2011 and 15% of sales in the first half of
2010. Operating profit was lower in the second quarter and first
half of 2011 than the corresponding periods in 2010 as the
margin benefits from the higher sales volumes were more than
offset by the plant
start-up
costs, the unfavorable change in product mix impact on margins,
higher expenses and other factors.
Technical
Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended
|
|
First Half Ended
|
|
|
July 1,
|
|
July 2,
|
|
July 1,
|
|
July 2,
|
(Millions)
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
Sales
|
|
$
|
23.0
|
|
|
$
|
18.4
|
|
|
$
|
42.6
|
|
|
$
|
33.9
|
|
Operating profit
|
|
|
2.4
|
|
|
|
2.0
|
|
|
|
4.5
|
|
|
|
3.1
|
|
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 of $23.0 million in the
second quarter 2011 were a 25% improvement over sales of
$18.4 million in the second quarter 2010. For the first
half of the year, sales improved $8.7 million, or 26%, from
$33.9 million in 2010 to $42.6 million in 2011. Sales
have grown over the comparable quarter in the prior year for
seven consecutive quarters.
Sales to the automotive electronics market grew approximately
36% in the second quarter 2011 and 45% in the first half of 2011
over the comparable periods in 2010 and accounted for the
majority of the improvement in Technical Materials sales.
Sales to the consumer electronics market also grew in the second
quarter 2011 over the second quarter 2010, although sales for
disk drive arm applications, a large application for this
segment, declined.
20
Energy market sales softened slightly in the second quarter
2011, but sales to this emerging market were higher in the first
half of 2011 than the first half of 2010.
The order entry rate slowed down in the second quarter 2011 from
the high level experienced in the first quarter 2011. A portion
of the slow down may be due to seasonal factors in the
marketplace. For the first half of the year, the order entry
rate was 2% less than sales.
Gross margin on Technical Materials sales was
$4.9 million, or 21% of sales, in the second quarter 2011
compared to $4.3 million, or 23% of sales, in the second
quarter 2010. Gross margin was $9.3 million in the first
half of 2011, an improvement of $2.0 million over the gross
margin of $7.3 million in the first half of 2010. Gross
margin was 22% of sales in the first half of 2011 and 2010.
The majority of the growth in the gross margin in the second
quarter and first half of 2011 was due to the higher sales
volume. The change in product mix was slightly unfavorable in
the second quarter 2011 but was favorable in the first half of
2011. Manufacturing overhead costs increased $0.2 million
in the second quarter and first half of 2011 over the respective
periods in 2010.
Total SG&A, R&D and
other-net
expenses were $2.5 million in the second quarter 2011 and
$2.2 million in the second quarter 2010. For the first half
of the year, these expenses totaled $4.8 million in 2011
and $4.2 million in 2010. Selling and marketing expenses,
including commissions and travel, were higher as these expenses
tend to vary with the level of sales. Fringe benefit costs were
also higher in the first half of 2011 than in the first half of
2010. This segments portion of the precious metal
consignment fee was higher in the first half of 2011 than the
first half of 2010 due to the increase in metal prices.
Technical Materials generated an operating profit of
$2.4 million in the second quarter 2011 compared to
$2.0 million in the second quarter 2010. Operating profit
of $4.5 million in the first half of 2011 was
$1.4 million higher than the operating profit of
$3.1 million in the first half of 2010. Operating profit
was 11% of sales in the first half of 2011 and 9% of sales in
the first half of 2010. Operating profit has improved over the
corresponding quarter in the prior year for six consecutive
quarters.
Legal
One of our subsidiaries, Materion Brush Inc. (formerly known as
Brush Wellman Inc.), has been 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
|
|
Quarter Ended
|
|
|
July 1, 2011
|
|
Apr. 1, 2011
|
|
Total cases pending
|
|
|
0
|
|
|
|
1
|
|
Total plaintiffs
|
|
|
0
|
|
|
|
3
|
|
Number of claims (plaintiffs) filed during period ended
|
|
|
0(0
|
)
|
|
|
0(0
|
)
|
Number of claims (plaintiffs) settled during period ended
|
|
|
1(3
|
)
|
|
|
0(0
|
)
|
Aggregate cost of settlements during period ended (dollars in
thousands)
|
|
$
|
0
|
|
|
$
|
43
|
|
Number of claims (plaintiffs) otherwise dismissed
|
|
|
0(0
|
)
|
|
|
1(3
|
)
|
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 approve the settlement and
dismiss the case until early in the second quarter 2011.
Should new beryllium claims arise, we would 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.
21
Although it is not possible to predict the outcome of any
litigation, 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.
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 a future case.
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 operating results,
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 operating activities was
$7.1 million in the first half of 2011 as net income and
the effects of depreciation were more than offset by a net
increase in working capital items, primarily accounts receivable
and inventory. However, cash flow improved in the second quarter
2011 over the first quarter 2011 as we generated
$13.7 million of cash from operations in the second quarter
2011 while having used cash in operations of $20.8 million
in the first quarter 2011.
Cash balances were $9.5 million as of the end
of the second quarter 2011, a decrease of $6.6 million from
year-end 2010.
Accounts receivable totaled $149.4 million at
the end of the second quarter 2011, a $10.0 million, or 7%,
increase over the balance as of December 31, 2010. The
growth in receivables was largely due to sales in the second
quarter 2011 being approximately 19% higher than sales in the
fourth quarter 2010. The impact of the higher sales volume on
the receivable balance was partially offset by an improvement in
the average collection period. The days sales outstanding, a
measure of how quickly receivables are collected, was
32 days as of the end of the second quarter 2011, an
improvement of three days from year-end 2010.
We continue to aggressively monitor and manage our credit
exposures and the collectability of our receivables. Our bad
debt experience remained low as the bad debt expense in the
first half of 2011 was only $0.1 million.
Other receivables totaling $2.7 million at
the end of the second quarter 2011 and $4.0 million at the
end of 2010 primarily represented amounts outstanding for
reimbursement of equipment purchased under a government
contract. The balances at the end of both periods also included
minor amounts due for other non-trade items.
Inventories were $182.4 million as of
July 1, 2011 compared to $154.5 million as of
December 31, 2010. While inventories grew 18% in the first
half of 2011, the inventory turnover ratio, a measure of how
quickly inventory is sold on average, improved during this same
time period and inventories have not been restocked at the same
rate as the increase in sales.
The majority of the increase in inventory is in Performance
Alloys in response to the higher level of demand. Performance
Alloys pounds in inventory increased by 10% during the
first half of 2011. 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.
22
Inventories within Advanced Material Technologies grew
approximately 11% in the first half of 2011. The majority of
this segments metal requirements are maintained through
off-balance sheet financing arrangements and the 11% growth is
only reflective of the change in the value of owned inventories.
Inventories within Beryllium and Composites increased 13% in the
first half of 2011 partially due to the ongoing
start-up of
the new beryllium facility and the related impact on material
flow.
Technical Materials inventories also showed minor
increases in order to support the higher business levels. Their
inventory turns improved during the first half of 2011.
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, copper and nickel, is
charged to cost of sales in the current period. The older, and
often times lower, costs are used to value the inventory on
hand. 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 half of 2011
and 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
First Half
|
|
(Millions)
|
|
2011
|
|
|
2010
|
|
|
|
|
Capital expenditures
|
|
$
|
11.1
|
|
|
$
|
24.8
|
|
Mine development
|
|
|
0.2
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
11.3
|
|
|
|
32.2
|
|
Reimbursement for spending under government contract
|
|
|
2.6
|
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
Net spending
|
|
$
|
8.7
|
|
|
$
|
17.3
|
|
|
|
|
|
|
|
|
|
|
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 half of 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. Capital spending on this project
totaled $1.6 million in the first half of 2011 and was
included within the $11.1 million of expenditures in the
above table. The spending and reimbursement received from the
government differed due to the 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.
Capital expenditures in the first half of 2011 included
$1.5 million for the purchase of a building at the Elmore
facility that was previously held under an operating lease.
The remainder of the capital spending was on isolated pieces of
equipment and various infrastructure projects across the
organization. Major projects undertaken during the first half of
2011 include a new dross reclamation system in Elmore, expansion
of the refine and shield kit cleaning operations in Buffalo,
expansion of the Singapore facility and upgrades to the electron
beam weld equipment in Lincoln.
Intangible assets were $34.2 million as of
the end of the second quarter and $36.8 million at year end
2010. The decline was due to the current period amortization net
of minor additions of deferred financing costs associated with
new debt agreements signed in 2011.
Other liabilities and accrued items totaled
$26.7 million at the end of the second quarter 2011
compared to $24.9 million at year-end 2010. This change is
due to an increase in the fair value of derivative financial
instruments, higher fringe benefit accruals and other items.
Unearned revenue, which is a liability
representing products invoiced to customers but not shipped, was
$2.8 million as of July 1, 2011 and $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.
23
Other long-term liabilities were
$18.1 million as of July 1, 2011, a slight increase
from the $17.9 million balance as of year-end 2010. There
were no material changes to the individual components of other
long-term liabilities during the first half of 2011.
Unearned income was $59.7 million at the end
of the second quarter 2011 compared to $57.2 million at
year-end 2010. This balance represents reimbursements from the
government for equipment purchases for the new beryllium
facility made under the Title III program. This liability
will be reduced and credited to income ratably with the
depreciation expense on the equipment.
The retirement and post-employment benefit balance
of $81.6 million at the end of the second quarter 2011 was
$0.9 million lower than 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 decreased a net
$1.3 million as a result of the contributions to the plan
of $3.6 million and an adjustment to other comprehensive
income, a component of shareholders equity, of
$1.7 million offset in part by the expense in the first
half of 2011 of $4.0 million.
The liability for the other retirement plans changed by minor
amounts due to differences between the payments made and the
expense recorded during the first half of 2011 and other factors.
Debt totaled $95.0 million as of the end of
the second quarter 2011, an increase of $8.9 million from
the total debt of $86.1 million at the end of 2010. After
increasing $18.6 million in the first quarter 2011, largely
as a result of financing capital expenditures, the growth in
accounts receivable and inventory and the payment of 2010
incentive compensation to employees, debt declined
$9.7 million in the second quarter 2011 on the strength of
the improved cash flow from operations.
Short-term debt, which included domestic and foreign currency
denominated loans, was $39.3 million as of the end of the
second quarter 2011. Long-term debt was $55.7 million as of
the end of the second quarter 2011. We were in compliance with
all of our debt covenants as of the end of the second quarter
2011.
In the second quarter 2011, we entered into a new
$8.0 million debt agreement with the Toledo Port Authority
and the Dayton Port Authority to fund capital expenditures at
our Ohio facilities. Initially, $1.5 million of the
proceeds was used to purchase an existing building at the Elmore
plant site that previously was being held under an operating
lease. The balance of the proceeds is being held in escrow and
will be drawn down as the applicable capital expenditures are
incurred. The agreement calls for monthly installment payments
and a $1.1 million balloon payment upon maturity in ten
years.
Shareholders equity was $415.5 million
at the end of the second quarter 2011, an increase of
$31.1 million from the balance of $384.4 million as of
year-end 2010 primarily due to comprehensive income of
$28.5 million (see Note E to the Consolidated
Financial Statements). Equity was also affected by stock-based
compensation expense, the exercise of stock options and other
factors.
Prior
Year Financial Position
Net cash used in operating activities was $20.7 million in
the first half of 2010 as net income and the effects of
depreciation were more than offset by a net increase in working
capital items, primarily receivables and inventory. Receivables
increased $61.3 million, or 73%, during the first half of
2010 as a result of the higher sales volume and a slowdown in
the average collection period. Inventories were
$10.2 million, or 8%, higher at the end of the second
quarter 2010 than year-end 2009 due to the higher levels of
business. The inventory turnover ratio improved during the first
half of 2010. The acquisition of Academy Corporation contributed
to the growth in receivables and inventory in the first quarter
2010 over the year-end 2009 levels.
Other liabilities and accrued items grew $1.9 million in
the first half of 2010 due to the current period incentive
compensation expense, the change in the fair value of
outstanding derivatives and other factors. The retirement and
post-employment benefit obligation of $78.6 million as of
the end of the second quarter 2010 was $3.7 million lower
than the year-end 2009 balance due to contributions made to the
domestic defined benefit plan of $4.5 million netted
against other factors.
24
Capital expenditures, net of reimbursements from the government
for purchases made for the beryllium facility in accordance with
the Title III contract, totaled $17.3 million.
Spending included $7.4 million on mine development at our
Utah site.
We purchased the outstanding capital stock of Academy
Corporation for $21.0 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.
Total debt stood at $120.5 million at the end of the second
quarter 2010, an increase of $56.0 million from year-end
2009. The increase in debt was used to fund the acquisition of
Academy Corporation, capital expenditures and the increase in
working capital. Cash on hand of $16.1 million at the end
of the second quarter 2010 was $3.8 million higher than the
year-end 2009 balance.
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
$310.9 million at the end of the second 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 half of 2011. The available and unused capacity under the
metal financing lines totaled approximately $29.1 million
as of July 1, 2011.
We were in compliance with the covenants contained in our
consignment agreements as of July 1, 2011.
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 available and unused borrowing capacity under the existing
lines of credit, which is subject to limitations set forth in
the debt covenants, was $154.7 million as of the end of the
second quarter 2011.
In July 2011, we negotiated a new five-year $325.0 million
revolving credit agreement to replace the former
$240.0 million revolving credit agreement that was
scheduled to mature in the fourth quarter 2012 by amending and
restating the agreement governing the former facility. In
addition to the higher borrowing capacity, various provisions
relating to allowable unsecured debt, acquisitions and other
items were revised in the new agreement to provide increased
flexibility. The key financial covenants in the new agreement,
including a leverage ratio and fixed charge coverage ratio, are
similar to the former agreement.
The outstanding cash balance was $9.5 million at the end of
the second quarter 2011.
The
debt-to-debt-plus-equity
ratio, a measure of balance sheet leverage, was 19% at the end
of the second quarter 2011 compared to 21% at the end of the
first quarter 2011 and 18% at year-end 2010. The movements in
debt in the first half of 2011 were partially due to changes in
working capital levels. Our normal pattern in recent years is to
consume cash in the first quarter and then generate cash over
the balance of the year.
While the capacity under the precious metal consignment lines
was increased during the first half of 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 metal
and/or
require customers to supply more of their own metal.
25
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
The order entry rate, while lower than the sales level, was
still solid in the second quarter 2011 and was higher than the
first quarter 2011. However, the order rate slowed down in the
latter part of the quarter and into the early portion of the
third quarter. This slow down may be due in part to an inventory
correction in the consumer electronics market. Seasonal factors
may also have affected the order entry rate as portions of
certain markets often slow down in the summer. The overall
backlog remains healthy and we are well positioned in the
majority of our markets for long-term growth. Even though
shipments to our largest market, consumer electronics, were
relatively flat in the second quarter 2011, our total sales
grew, demonstrating the benefits of our product and market
diversification efforts over recent years.
The negative margin impact from the
start-up of
the new beryllium facility should lessen over the balance of
2011, as we believe the facility should be operational prior to
year end. Costs associated with the company name change will
continue in the second half of 2011, but these marketing
expenses will be lower than the costs incurred on this program
during the first half of the year. We are also undertaking a
number of initiatives that are designed to improve profitability
in the long term, but will add to our cost structure during
2011. Cost control and cost reduction efforts will be
implemented where possible to help offset the cost pressures
from the higher pension expense, metal consignment fees and
other items.
Forward-Looking
Statements
Portions of the narrative set forth in this document that are
not statements of historical or current facts are
forward-looking statements. Our actual future performance may
materially differ from that contemplated by the forward-looking
statements as a result of a variety of factors. These factors
include, in addition to those mentioned elsewhere herein:
|
|
|
|
|
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, 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;
|
|
|
|
The impact of the results of acquisitions 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 in Elmore, Ohio;
|
26
|
|
|
|
|
The availability of adequate lines of credit and the associated
interest rates;
|
|
|
|
Other financial factors, including 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;
|
|
|
|
The timing and ability to achieve further efficiencies and
synergies resulting from our name change and product line
alignment under the Materion name and Materion brand; and,
|
|
|
|
The risk factors set forth in Part 1, Item 1A of our
Annual Report on
Form 10-K
for the year ended December 31, 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 year 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 July 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 identified in connection with the evaluation
required by
Rule 13a-15
under the Securities Exchange Act of 1934, as amended, that
occurred during the quarter ended July 1, 2011 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
27
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 July 1, 2011, our subsidiary, Materion Brush Inc.,
was not a defendant in any proceedings brought by plaintiffs
alleging that they had contracted, or had 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 sought recovery under
negligence and various other legal theories and sought
compensatory and punitive damages, in many cases of an
unspecified sum. Spouses of some plaintiffs claimed loss of
consortium.
During the second quarter of 2011, the number of beryllium cases
decreased from one case (involving three plaintiffs) to no
pending beryllium cases as of July 1, 2011. As previously
reported, one case (involving three plaintiffs) settled during
the first quarter, but the case had not been dismissed by the
court. That case has now been dismissed. No cases were filed
during the quarter. The Company has no pending beryllium cases.
The Company has some insurance coverage, subject to an annual
deductible.
|
|
Item 5.
|
Other
Information
|
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 quarter
ended July 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 quarter ended
July 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.
|
|
|
|
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.
|
28
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
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 July 1, 2011, no legal actions are
pending.
|
|
|
|
|
|
3
|
|
|
Amended and Restated Code of Regulations.
|
|
10
|
.1
|
|
Amended and Restated Credit Agreement dated July 13, 2011
among Materion Corporation, Materion Advanced Materials
Technologies and Services Netherlands B.V., JPMorgan Chase Bank,
N.A. and other lenders from time to time party thereto (filed as
Exhibit 10.1 to the Registrants
Form 8-K
(File
No. 1-15885)
filed on July 18, 2011), incorporated herein by reference.
|
|
10
|
.2
|
|
Amendment No. 1 to Amended and Restated Severance
Agreement, dated May 4, 2011.
|
|
10
|
.3
|
|
Third Amendment to the Brush Engineered Materials Inc. Amended
and Restated Executive Deferred Compensation Plan II, dated
July 6, 2011.
|
|
10
|
.4
|
|
Amendment No. 3 to the Brush Engineered Materials Inc. Key
Employee Share Option Plan dated July 12, 2011.
|
|
10
|
.5
|
|
Amended and Restated Materion Corporation 2006 Stock Incentive
Plan (as Amended and Restated as of May 4, 2011) (filed as
Exhibit 10.1 to the Registrants
Form 8-K
(File
No. 1-15885)
filed on May 5, 2011), incorporated herein by reference.
|
|
10
|
.6
|
|
Amended and Restated Materion Corporation 2006 Non-employee
Director Equity Plan (as Amended and Restated as of May 4,
2011) (filed as Appendix B to the Registrants Proxy
Statement (File
No. 1-15885)
filed on March 25, 2011), incorporated herein by reference.
|
|
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.
|
|
*101
|
.INS
|
|
XBRL Instance Document
|
|
*101
|
.SCH
|
|
SBRL Taxonomy Extension Schema Document
|
|
*101
|
.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
*101
|
.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
*101
|
.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
|
* |
|
XBRL (Extensible Business Reporting Language) information is
furnished and not filed or a part of a registration statement or
prospectus for purposes of sections 11 or 12 of the
Securities Act of 1933, is deemed not filed for purposes of
section 18 of the Securities Exchange Act of 1934, and
otherwise is not subject to liability under these sections. |
29
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: August 9, 2011
30