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Materion Corporation Reports Fourth Quarter and Full-Year 2016 Financial Results and Provides 2017 Earnings GuidanceMaterion Corporation (NYSE:MTRN) today reported fourth quarter and full-year 2016 financial results.
FOURTH QUARTER 2016 RESULTS Net sales for the fourth quarter of 2016 were $234.3 million, compared to $214.0 million for the fourth quarter of 2015. Value-added sales for the fourth quarter of 2016 were $145.1 million, an increase of 1%, compared to $143.4 million for the fourth quarter of 2015. The year-over-year increase in value-added sales in the fourth quarter of 2016 is primarily due to double-digit growth in value-added sales into our two largest end markets, consumer electronics and industrial components. The increase in both markets was driven by new product sales combined with year-over-year end market demand improvement. New product value-added sales totaled $25.7 million in the fourth quarter of 2016, a 47% increase from fourth quarter 2015 levels. This growth was offset by a decline in medical end market sales and a lack of raw material beryllium hydroxide sales in the fourth quarter of 2016. Medical end market sales decreased as our largest blood glucose test strip customer began to transition from its legacy product to a next-generation product. The Company was the primary supplier of the legacy product and fully anticipates being a critical supplier of the next-generation product. However, the customer's product transition will cause a temporary disruption in our sales volume. Net income in the fourth quarter of 2016 totaled $6.8 million, or $0.33 per share, diluted, compared to $6.7 million, or $0.33 per share, diluted, in the fourth quarter of 2015. Adjusted earnings for the fourth quarter of 2016, which excludes an asset impairment charge for the planned closure of our service center in Fukaya, Japan, acquisition costs, and a nonrecurring foreign tax credit, totaled $5.8 million, or $0.28 per share, diluted, as compared to $7.2 million, or $0.36 per share, diluted, in the fourth quarter of 2015. The decrease in adjusted earnings is due primarily to a $1.2 million decrease in foreign exchange hedge gains and an increase in stock-based compensation expense, primarily related to the Company's stock price appreciation during the fourth quarter of 2016. FULL-YEAR 2016 RESULTS Net sales for the full-year of 2016 were $969.2 million compared to net sales of $1.0 billion for 2015. Value-added sales for 2016 were $599.9 million, as compared to $617.2 million for 2015. The $17.3 million, or 3%, decrease in value-added sales year over year was driven by lower raw material beryllium hydroxide sales of $12.4 million, continued weakness in the energy end market, and the decline in medical end market sales experienced during the fourth quarter of 2016. These headwinds were offset by 4.5% growth in our largest end market, consumer electronics, as well as growth in other select end markets such as defense and telecommunications infrastructure, both of which benefited from successful new product launches. Overall, new product sales were 14% of total value-added sales in 2016 as compared to 12% of total value-added sales in 2015. Net income in 2016 totaled $25.7 million, or $1.27 per share, diluted, compared to $32.2 million, or $1.58 per share, diluted, in 2015. Adjusted earnings for 2016, which exclude acquisition costs, an asset impairment charge, legacy legal and environmental expenses, and nonrecurring foreign tax credits, totaled $26.6 million, or $1.32 per share, diluted, as compared to $32.7 million, or $1.60 per share, diluted, in 2015. Adjusted earnings decreased as the Company realized $6.2 million of foreign currency hedge gains in 2015 that were not realized in 2016. Additionally, lower sales volumes in 2016 as compared to 2015 were partially offset by new product sales growth and improved manufacturing yields. CHAIRMAN'S COMMENTS Richard J. Hipple, Chairman, President and Chief Executive Officer, stated, "Despite a challenging 2016 brought on by weakness in several of our key end markets and the continued strength of the U.S. dollar, we still managed to deliver results in line with the annual earnings guidance we provided at the beginning of 2016. We delivered this performance by continuing our focus on introducing new products, combined with cost reduction initiatives. We are excited as we enter into 2017 and prepare for the integration of the Heraeus high-performance target materials business scheduled to close later in the first quarter of 2017. This acquisition, combined with growth in several key end markets, is forecast to deliver profitable growth in 2017." BUSINESS SEGMENT REPORTING Performance Alloys and Composites Net sales for Performance Alloys and Composites in the fourth quarter of 2016 were $95.5 million versus net sales of $90.3 million in the fourth quarter of 2015. Value-added sales were $83.2 million in the fourth quarter of 2016, up 6% compared to $78.4 million in the fourth quarter of 2015. The increase in value-added sales was due to stronger demand in several key end markets, particularly consumer electronics, telecommunications infrastructure, and industrial components, which more than offset the absence of raw material beryllium hydroxide sales in the fourth quarter of 2016. Operating profit for the fourth quarter of 2016 was $0.5 million, which included a $2.6 million non-cash asset impairment charge for Fukaya, Japan. Excluding this charge, adjusted operating profit for the fourth quarter of 2016 was $3.1 million, a 7% increase over 2015 fourth quarter operating profit of $2.9 million. Value-added sales growth drove the adjusted operating profit expansion, despite the absence of a $1.2 million foreign exchange hedge gain which was recognized in the prior-year fourth quarter. Advanced Materials Advanced Materials' net sales for the fourth quarter of 2016 were $108.3 million, which compares to fourth quarter of 2015 net sales of $87.4 million. Value-added sales for the fourth quarter of 2016 were $41.2 million, compared to $39.8 million for the fourth quarter of 2015. The 4% increase in fourth quarter value-added sales year over year was primarily due to stronger sales into the consumer electronics and industrial components end markets. Operating profit for the fourth quarter of 2016 was $5.5 million, up 22% compared to operating profit of $4.5 million in the fourth quarter of 2015. The increase in operating profit was due to sales volume growth and improved product mix. Precision Coatings Precision Coatings' net sales for the fourth quarter of 2016 were $30.5 million versus net sales of $36.4 million for the fourth quarter of 2015. Value-added sales for the fourth quarter of 2016 were $22.2 million, compared to value-added sales of $26.4 million for the same period of 2015. The decrease in value-added sales was due to lower sales into the medical end market, as a significant customer who manufactures blood glucose test strips began transitioning to a next-generation product. Precision Coatings' operating profit for the fourth quarter of 2016 was $1.8 million, or 8% of value-added sales, a decrease compared to $3.0 million in the same period of the prior year primarily due to the aforementioned customer product transition. Other The Other segment includes unallocated corporate costs, which totaled $4.2 million in 2016 versus $2.3 million in 2015. Excluding special items for acquisition costs and legacy environmental reserves, adjusted corporate costs were $3.2 million in 2016 versus $1.6 million in 2015. The increase was primarily due to higher stock-based compensation expense year over year related to stock price appreciation during the fourth quarter of 2016. OUTLOOK At a macroeconomic level, we are cautiously optimistic about 2017 based on the year-over-year sales growth experienced in the second half of 2016 in several key end markets. For example, we believe that the oil and gas exploration market has bottomed out based on our review of key indicators, and we expect modest growth in 2017. In addition, we began to experience an increase in demand for products into the industrial components end market, both year over year and sequentially, in the fourth quarter of 2016. However, there continues to be general uncertainty regarding the future economic impact of potential U.S. policy changes due to the new presidential administration. In addition, the exact timing of our customer's transition from the legacy 'sole-sourced' product to the next-generation blood glucose test strip material, which will be shared with another supplier, and demand for raw material beryllium hydroxide remain uncertain. With the combination of these growth initiatives and headwinds, we expect our continued focus on new products, cost reduction initiatives, and the acquisition and integration of Heraeus' high-performance target materials business to more than offset near-term challenges. Based on these factors, Materion forecasts full-year 2017 earnings to be in the range of $1.45 to $1.60 per share. The mid-point of the earnings range represents an approximate 15% growth over 2016 adjusted earnings. CONFERENCE CALL Materion Corporation will host a conference call with analysts at 9:00 a.m. Eastern Standard Time, February 17, 2017. The conference call will be available via webcast through the Company's website at www.materion.com or through www.InvestorCalendar.com. By phone, please dial (877) 407-0778. Callers outside the U.S. can dial (201) 689-8565. A replay of the call will be available until March 4, 2017 by dialing (877) 481-4010 or (919) 882-2331; please reference Replay ID Number 10201. The call will also be archived on the Company's website. ADJUSTED EARNINGS GUIDANCE It is not possible for the Company to identify the amount or significance of future adjustments associated with potential insurance and other litigation claims, legacy environmental costs, acquisition costs, certain income tax items, or other non-routine costs that the Company adjusts in the presentation of adjusted earnings guidance. These items are dependent on future events that are not reasonably estimable at this time. Accordingly, the Company is unable to reconcile without unreasonable effort the forecasted range of adjusted earnings guidance for the full year to a comparable GAAP range. However, items excluded from the Company's adjusted earnings guidance include the historical adjustments noted in Attachments 4 and 5 to this press release. FORWARD-LOOKING STATEMENTS Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking statements, in particular, the outlook provided above. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. These factors include, in addition to those mentioned elsewhere herein:
Materion Corporation is headquartered in Mayfield Heights, Ohio. The Company, through its wholly owned subsidiaries, supplies highly engineered advanced enabling materials to global markets. Products include precious and non-precious specialty metals, inorganic chemicals and powders, specialty coatings, specialty engineered beryllium alloys, beryllium and beryllium composites, and engineered clad and plated metal systems.
The cost of gold, silver, platinum, palladium, and copper is passed through to customers and, therefore, the trends and comparisons of net sales are affected by movements in the market price of these metals. Internally, management also reviews net sales on a value-added basis. Value-added sales are a non-GAAP measure that deducts the value of the pass-through metals sold from net sales. Value-added sales allows management to assess the impact of differences in net sales between periods or segments and analyze the resulting margins and profitability without the distortion of the movements in pass-through metal prices. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. The Company sells other metals and materials that are not considered direct pass throughs, and these costs are not deducted from net sales to calculate value-added sales. The Company's pricing policy is to pass the cost of these metals on to customers in order to mitigate the impact of price volatility on the Company's results from operations. Value-added information is being presented since changes in metal prices may not directly impact profitability. It is the Company's intent to allow users of the financial statements to review sales with and without the impact of the pass-through metals.
In addition to presenting financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP), this earnings release contains financial measures, including gross margin, operating profit, segment operating profit, net income, and earnings per share, on a non-GAAP basis. As detailed in the above reconciliation and Attachment 4, we have adjusted the results for certain special items such as cost reduction initiatives (i.e., asset impairment charges and severance), legacy legal and environmental costs, merger and acquisition costs, and certain income tax items from the applicable GAAP measure. Internally, management reviews the results of operations without the impact of these costs in order to assess the profitability from ongoing activities. We are providing this information because we believe it will assist investors in analyzing our financial results and, when viewed in conjunction with the GAAP results, provide a more comprehensive understanding of the factors and trends affecting our operations.
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