Materion Corporation (MTRN)

MTRN 
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Materion Corporation (NYSE:MTRN)

Q2 2014 Earnings Conference Call

July 24, 2014 9:00 AM ET

Executives

Michael Hasychak – VP, Treasurer and Secretary

Joe Kelley – VP, Finance

John Grampa – SVP, Finance and CFO

Richard Hipple – Chairman, President and CEO

Analysts

Avinash Kant – D.A. Davidson

Luke Folta – Jefferies

Edward Marshall – Sidoti and Company

Presentation

Operator

Greetings and welcome to the Materion Corporation Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Michael Hasychak. Thank you. You may begin.

Michael Hasychak

Good morning, this is Mike Hasychak, Vice President, Treasurer and Secretary. With me today is Dick Hipple, President, Chairman and CEO; John Grampa, Senior Vice President, Finance and Chief Financial Officer; Joe Kelley, Vice President of Finance; and Jim Marrotte, Vice President and Corporate Controller.

Our format for today’s conference call is as follows; Joe Kelley will review the financial results for the quarter, then John Grampa will review the outlook for the remainder of 2014. Following John’s comments, Dick Hipple will review the current state of our key markets and provide his perspective on certain specific key new product initiatives and other developments. Following, we will open up the call for your questions.

A recorded playback of this call will be available until August 8, by dialing area code 877, the number is 660-6853 or you can also dial area code 201 and the number is 612-7415, the conference ID number is 13586002. The call will also be archived on the company’s website, materion.com. To access the replay, just click on Events and Presentations on the Investor Relations page.

Any forward-looking statements made in this announcement, including those in the outlook section and during the question-and-answer portion are based on current expectations. The company’s actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release that was issued this morning.

And now, I’ll turn it over to Joe Kelly.

Joe Kelley

Thank you, Mike. I will cover the second quarter sales, value added sales, profit margins and earnings. I will review business profitability by segment, I will then review the changes in value-added sales by key end market. I will also make the brief comments on the balance sheet and cash flow.

Looking at our second quarter 2014 financial performance, sales for the quarter were $288 million, down $18.1 million or 6% from second quarter 2013 levels, driven primarily by changes in precious metal market pricing and mix of customer supply material.

Value-added sales which excludes pass-through metal costs for the second quarter were $159.6 million, up 5% over the prior year second quarter value-added sales, and up 10% sequentially over the first quarter of 2014 levels. The year-over-year growth in value-added sales is attributable to increased volumes into consumer electronics, primarily the semiconductor market phase and the increased volumes for medical applications. Value-added sales into these end markets grew approximately 16% over prior year second quarter levels. The above market growth rate in these two key industries was primarily offset by declining volumes in defense and automotive electronics.

Gross margins in the second quarter was $49.8 million, up 8% from the prior year second quarter gross margin of $46 million. The gross margin expressed as a percent of value-added sales was 31% in the quarter, up 100 basis points over the prior year margins of 30%. Improved volumes leverage and manufacturing efficiencies related to the company’s late 2013 facility consolidation efforts resulted in improved profit margins year-over-year despite deterioration in product mix within several of our business segments.

We are clearly starting to see the financial benefits from our facility closure and product line rationalization efforts which are on-track to deliver the annual benefit previously forecasted of $0.30 per share compared to the 2013 earnings levels.

Operating profit for the second quarter of 2014 was $14.6 million, up 122% or $8 million over the prior year second quarter operating profit of $6.6 million. This includes a net benefit of $3.8 million, primarily related to the insurance recovery associated with the 2012 inventory invest from Albuquerque facility offset with recovery cost and related incentive compensation. Excluding this net benefit, adjusted operating profit was $10.7 million, up 64% or $4.2 million over the prior year second quarter level.

Adjusted operating profit margins expressed as a percent of value-added sales was 6.7% in the quarter, 40 basis points ahead of first quarter 2014 levels, and 240 basis points over prior year levels.

Net income for the second quarter was $10 million or $0.47 per share, up 135% from prior year levels. Adjusted for the net benefit, primarily coming from the insurance recovery, net income was $7.5 million or $0.36 per share. This is a sequentially 24% ahead of first quarter 2014 earnings levels, and 80% ahead of second quarter 2013 earnings per share.

Although improving year-over-year and sequentially, adjusted earnings in the second quarter were below our internal and street estimates by approximately $0.09 per share. The shortfall to expectations was driven by unexpected declines in the defense and the automotive electronics and markets. We had expected defense to be flat and automotive to be up single digits. Despite the myth, compared to our expectations, we are improving the overall profitability of the consolidated Materion business as profit margins expand sequentially and year-over-year.

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