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EX-11 - EXHIBIT 11 - MATERION Corpmtrn-ex11_2015102q310q.htm
EX-95 - EXHIBIT 95 - MATERION Corpmtrn-ex95_2015102q310q.htm
EX-32 - EXHIBIT 32 - MATERION Corpmtrn-ex32_2015102q310q.htm
EX-31.1 - EXHIBIT 31.1 - MATERION Corpmtrn-ex311_2015102q310q.htm
EX-31.2 - EXHIBIT 31.2 - MATERION Corpmtrn-ex312_2015102q310q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________________________________ 
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2015
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-15885
MATERION CORPORATION
(Exact name of Registrant as specified in charter)
 
Ohio
 
34-1919973
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
6070 Parkland Blvd., Mayfield Hts., Ohio
 
44124
(Address of principal executive offices)
 
(Zip Code)
Registrant’s 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  ¨
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  ¨
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.
Large accelerated filer  þ
Accelerated filer   ¨
Non-accelerated filer  ¨
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  ¨        No  þ
As of October 23, 2015, there were 20,002,054 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 third quarter and nine months ended October 2, 2015 are as follows:
 
 
Third quarter and nine months ended October 2, 2015 and September 26, 2014
 
 
 
 
 
 
Third quarter and nine months ended October 2, 2015 and September 26, 2014
 
 
 
 
 
 
October 2, 2015 and December 31, 2014
 
 
 
 
 
 
Nine months ended October 2, 2015 and September 26, 2014
 




1



Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 
 
Third Quarter Ended
 
Nine Months Ended
 
 
Oct. 2,
 
Sept. 26,
 
Oct. 2,
 
Sept. 26,
(Thousands, except per share amounts)
 
2015
 
2014
 
2015
 
2014
Net sales
 
$
244,354

 
$
291,570

 
$
811,233

 
$
838,465

Cost of sales
 
200,351

 
236,727

 
663,548

 
688,359

Gross margin
 
44,003

 
54,843

 
147,685

 
150,106

Selling, general, and administrative expense
 
29,753

 
34,510

 
101,578

 
100,584

Research and development expense
 
2,501

 
3,243

 
9,435

 
9,473

Other—net
 
1,590

 
(644
)
 
(532
)
 
(3,177
)
Operating profit
 
10,159

 
17,734

 
37,204

 
43,226

Interest expense—net
 
586

 
764

 
1,893

 
2,132

Income before income taxes
 
9,573

 
16,970

 
35,311

 
41,094

Income tax expense
 
2,637

 
4,326

 
9,868

 
11,229

Net income
 
$
6,936

 
$
12,644

 
$
25,443


$
29,865

Basic earnings per share:
 
 
 
 
 
 
 
 
Net income per share of common stock
 
$
0.35

 
$
0.62

 
$
1.26

 
$
1.45

Diluted earnings per share:
 
 
 
 
 
 
 
 
Net income per share of common stock
 
$
0.34

 
$
0.61

 
$
1.24

 
$
1.42

Cash dividends per share
 
$
0.090

 
$
0.085

 
$
0.265

 
$
0.250

Weighted-average number of shares of common stock outstanding:
 
 
 
 
 
 
 
 
Basic
 
20,087

 
20,490

 
20,128

 
20,579

Diluted
 
20,383

 
20,870

 
20,458

 
20,971





















Refer to Notes to Consolidated Financial Statements.




2



Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
 
Third Quarter Ended
 
Nine Months Ended
 
 
Oct. 2,
 
Sept. 26,
 
Oct. 2,
 
Sept. 26,
(Thousands)
 
2015
 
2014
 
2015
 
2014
Net income
 
$
6,936

 
$
12,644

 
$
25,443

 
$
29,865

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
359

 
(2,170
)
 
(895
)
 
(1,455
)
Derivative and hedging activity, net of tax
 
(1,177
)
 
1,480

 
(1,778
)
 
1,567

Pension and post-employment benefit adjustment, net of tax
 
901

 
540

 
2,705

 
10,465

Net change in accumulated other comprehensive income
 
83

 
(150
)
 
32

 
10,577

Comprehensive income
 
$
7,019

 
$
12,494

 
$
25,475

 
$
40,442





































Refer to Notes to Consolidated Financial Statements.




3



Materion Corporation and Subsidiaries
Consolidated Balance Sheets

 
 
(Unaudited)
 
 
 
 
Oct. 2,
 
Dec. 31,
(Thousands)
 
2015
 
2014
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
24,826

 
$
13,150

Accounts receivable
 
113,961

 
112,780

Inventories
 
221,547

 
232,409

Prepaid expenses
 
16,902

 
14,953

Deferred income taxes
 
11,919

 
13,402

Total current assets
 
389,155

 
386,694

Long-term deferred income taxes
 
17,722

 
17,991

Property, plant, and equipment
 
826,286

 
800,671

Less allowances for depreciation, depletion, and amortization
 
(565,086
)
 
(553,083
)
Property, plant, and equipment—net
 
261,200

 
247,588

Intangible assets
 
14,312

 
18,559

Other assets
 
5,023

 
4,781

Goodwill
 
86,725

 
86,725

Total Assets
 
$
774,137

 
$
762,338

Liabilities and Shareholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Short-term debt
 
$
15,234

 
$
653

Accounts payable
 
29,017

 
36,239

Other liabilities and accrued items
 
49,325

 
59,151

Income taxes
 
3,764

 
3,144

Unearned revenue
 
4,105

 
4,879

Total current liabilities
 
101,445

 
104,066

Other long-term liabilities
 
17,344

 
18,203

Retirement and post-employment benefits
 
98,093

 
103,891

Unearned income
 
47,099

 
51,796

Long-term income taxes
 
1,750

 
1,750

Deferred income taxes
 
2,232

 

Long-term debt
 
31,038

 
23,613

Shareholders’ equity
 


 


Serial preferred stock
 

 

Common stock
 
207,432

 
204,634

Retained earnings
 
494,745

 
474,633

Common stock in treasury
 
(148,461
)
 
(140,938
)
Other comprehensive income (loss)
 
(82,205
)
 
(82,237
)
Other equity transactions
 
3,625

 
2,927

Total shareholders' equity
 
475,136

 
459,019

Total Liabilities and Shareholders’ Equity
 
$
774,137

 
$
762,338

Refer to Notes to Consolidated Financial Statements.



4



Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited) 
 
 
Nine Months Ended
 
 
Oct. 2,
 
Sept. 26,
(Thousands)
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net income
 
$
25,443

 
$
29,865

Adjustments to reconcile net income to net cash provided from operating activities:
 
 
 
 
Depreciation, depletion, and amortization
 
26,069

 
26,808

Amortization of deferred financing costs in interest expense
 
497

 
627

Amortization of mine development costs
 
2,393

 
5,525

Stock-based compensation expense (non-cash)
 
4,518

 
3,940

Changes in assets and liabilities net of acquired assets and liabilities:
 
 
 
 
Decrease (increase) in accounts receivable
 
(1,583
)
 
(15,184
)
Decrease (increase) in inventory
 
9,928

 
(24,148
)
Decrease (increase) in prepaid and other current assets
 
(1,965
)
 
(579
)
Decrease (increase) in deferred income taxes
 
3,841

 
71

Increase (decrease) in accounts payable and accrued expenses
 
(19,299
)
 
2,315

Increase (decrease) in unearned revenue
 
(773
)
 
760

Increase (decrease) in interest and taxes payable
 
896

 
6,017

Increase (decrease) in long-term liabilities
 
(5,175
)
 
(14,976
)
Other-net
 
54

 
(14
)
Net cash provided by operating activities
 
44,844

 
21,027

Cash flows from investing activities:
 
 
 
 
Payments for purchase of property, plant, and equipment
 
(24,085
)
 
(19,843
)
Payments for mine development
 
(16,972
)
 
(670
)
Proceeds from sale of property, plant, and equipment
 
43

 
3,084

Other investments-net
 

 
(2
)
Net cash (used in) investing activities
 
(41,014
)
 
(17,431
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance (repayment) of short-term debt
 
14,152

 
(291
)
Proceeds from issuance of long-term debt
 
53,990

 
33,252

Repayment of long-term debt
 
(46,275
)
 
(18,739
)
Principal payments under capital lease obligations
 
(582
)
 
(497
)
Cash dividends paid
 
(5,331
)
 
(5,156
)
Repurchase of common stock
 
(7,129
)
 
(15,615
)
Issuance of common stock under stock option plans
 

 
360

Tax benefit from stock compensation realization
 

 
109

Net cash provided by (used in) financing activities
 
8,825

 
(6,577
)
Effects of exchange rate changes
 
(979
)
 
(183
)
Net change in cash and cash equivalents
 
11,676

 
(3,164
)
Cash and cash equivalents at beginning of period
 
13,150

 
22,774

Cash and cash equivalents at end of period
 
$
24,826

 
$
19,610


Refer to Notes to Consolidated Financial Statements.



5


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)



Note A — Accounting Policies
In management’s opinion, the accompanying consolidated financial statements of Materion Corporation and its subsidiaries (Company) contain all of the adjustments necessary to present fairly the financial position as of October 2, 2015 and December 31, 2014, and the results of operations for the three months and nine months ended October 2, 2015 and September 26, 2014. All adjustments were of a normal and recurring nature, with the exception of certain adjustments referenced in Note B. Certain amounts in prior years have been reclassified to conform to the 2015 consolidated financial statement presentation.
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory. Inventory within the scope of this update is required to be measured at the lower of its cost or net realizable value, with net realizable value being the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective prospectively for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact of adopting this standards update on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires companies to present debt issuance costs associated with a debt liability as a deduction from the carrying amount of that debt liability on the balance sheet rather than being capitalized as an asset. In ASU 2015-08, the FASB clarified the presentation of debt issuance costs related to line-of-credit arrangements as an asset is acceptable, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The standards are effective for interim and annual periods beginning after December 15, 2015, and retrospective presentation is required. We will adopt this ASU as required. The ASU will not have a material effect on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount, and timing of revenue and cash flows arising from contracts. This ASU is effective beginning in fiscal year 2018 with a provision for early adoption in 2017. The standard can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
No other recently issued ASUs are expected to have a material effect on our results of operations, financial condition, or liquidity.
Note B — Revised Financial Statements
In the third quarter 2015, the Company identified an error relating to its stock-based compensation expense. The vesting period of awards made under the Company's 2006 Stock Incentive Plan (the “Plan”) generally has been three years and, as such, the Company recognized stock-based compensation expense ratably over the vesting period, presuming the requisite service period to be the vesting period. However, grants made pursuant to the Plan provide that the awards continue to vest if the employee retires. Accordingly, the Company has determined that the requisite service period for awards does not extend beyond the date on which an employee becomes eligible to retire, which causes the requisite service period to be the shorter of three years or the period from the grant date to the date on which each employee becomes retirement eligible. This conclusion has resulted in an acceleration of the recognition of the cost of awards to persons becoming retirement eligible within three years of the grant date.
The Company assessed the after-tax impact of this error on the current year interim periods, which would have reduced Net income by $0.7 million for the first quarter and increased Net income by $0.2 million for the second quarter. Additionally, the Company assessed the impact on prior annual periods, which would have decreased Net income by $0.4 million in 2012 and increased Net income by $0.5 million and $0.4 million in 2013 and 2014, respectively. Based on these assessments, the Company determined that the impact of the error was not material to any previously issued financial statements. However, the cumulative effect of this error was material to both the third quarter and expected full-year 2015 results. Accordingly, the Company is



6


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


revising its previously issued financial statements to facilitate comparisons across periods. As summarized below, Retained earnings at December 31, 2014 was adjusted by the cumulative effect of this error by $1.6 million, net of tax.
The Company has revised the Consolidated Balance Sheet as of December 31, 2014 and the Consolidated Statements of Income for the three and nine months ended September 26, 2014. The correction of this error did not result in a change to net cash provided by operating activities for the nine months ended September 26, 2014. The Company will revise additional financial statements and disclosures as applicable in future filings.
Consolidated Balance Sheet
 
 
 
 
 
 
(Thousands)
 
Dec. 31, 2014
 
 
Previously Reported
 
Revision Adjustment
 
As Revised
Long-term deferred income taxes (asset)

 
$
17,722

 
$
269

 
$
17,991

Deferred income taxes (liability)
 
617

 
(617
)
 

Common stock
 
202,104

 
2,530

 
204,634

Retained earnings
 
476,277

 
(1,644
)
 
474,633


Consolidated Statement of Income
 
 
 
 
 
 
 
 
 
 
 
 
(Thousands, except per share amounts)
 
Third Quarter Ended Sept. 26, 2014
 
Nine Months Ended Sept. 26, 2014
Selected Items
 
Previously Reported
 
Revision Adjustment
 
As Revised
 
Previously Reported
 
Revision Adjustment
 
As Revised
Selling, general, and administrative expense
 
$
34,823

 
$
(313
)
 
$
34,510

 
$
100,768

 
$
(184
)
 
$
100,584

Income tax expense
 
4,217

 
109

 
4,326

 
11,165

 
64

 
11,229

Net income
 
12,440

 
204

 
12,644

 
29,745

 
120

 
29,865

 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share of common stock
 
$
0.61

 
$
0.01

 
$
0.62

 
$
1.45

 
$

 
$
1.45

Diluted earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share of common stock
 
$
0.60

 
$
0.01

 
$
0.61

 
$
1.42

 
$

 
$
1.42


Note C — Costs Reduction Initiatives
In the third quarter of 2015, the Company recorded realignment charges of $1.8 million in its Other reportable segment due to weakened demand in the projector display segment of the consumer electronics end market and the elimination of executive positions. The realignment charges primarily consisted of severance costs related to approximately 30 employees. The realignment charges are presented in the Consolidated Statement of Income in the following captions: $0.6 million in Cost of sales and $1.2 million in Selling, general, and administrative expenses.



7


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


Note D — Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:
 
 
Oct. 2,
 
Dec. 31,
(Thousands)
 
2015
 
2014
Principally average cost:
 
 
 
 
Raw materials and supplies
 
$
34,274

 
$
39,559

Work in process
 
150,987

 
155,377

Finished goods
 
36,286

 
37,473

Net inventories
 
$
221,547

 
$
232,409

The Company recognized last-in, first-out (LIFO) liquidation benefits of $0.5 million and $2.4 million in the third quarter and first nine months of 2015, respectively, due to a forecasted reduction in year-end inventory.
Note E — Pensions and Other Post-employment Benefits
The following is a summary of the net periodic benefit cost for the third quarter and first nine months of 2015 and 2014 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan.
 
 
Pension Benefits
 
Other Benefits
 
 
Third Quarter Ended
 
Third Quarter Ended
 
 
Oct. 2,
 
Sept. 26,
 
Oct. 2,
 
Sept. 26,
(Thousands)
 
2015
 
2014
 
2015
 
2014
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
2,231

 
$
1,931

 
$
29

 
$
34

Interest cost
 
2,500

 
2,449

 
139

 
169

Expected return on plan assets
 
(3,354
)
 
(3,013
)
 

 

Amortization of prior service cost (benefit)
 
(113
)
 
(109
)
 
(374
)
 
(374
)
Amortization of net loss
 
1,820

 
1,275

 

 

Net periodic benefit cost (benefit)
 
$
3,084

 
$
2,533

 
$
(206
)
 
$
(171
)
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
 
Nine Months Ended
 
Nine Months Ended
 
 
Oct. 2,
 
Sept. 26,
 
Oct. 2,
 
Sept. 26,
(Thousands)
 
2015
 
2014
 
2015
 
2014
Components of net periodic benefit cost
 
 
 
 
 
 
 
 
Service cost
 
$
6,692

 
$
5,794

 
$
87

 
$
103

Interest cost
 
7,500

 
7,345

 
415

 
506

Expected return on plan assets
 
(10,062
)
 
(9,038
)
 

 

Amortization of prior service cost (benefit)
 
(337
)
 
(326
)
 
(1,122
)
 
(1,123
)
Amortization of net loss
 
5,459

 
3,825

 

 

Net periodic benefit cost (benefit)
 
$
9,252

 
$
7,600

 
$
(620
)
 
$
(514
)
The Company made contributions to the domestic defined benefit pension plans of $8.0 million in the first nine months of 2015.
In 2014, the Company amended its domestic retiree medical plan, including changing the benefit formula for participants covered by the plan. The revised benefit formula is designed to lower costs for the Company and the majority of plan participants. As a result of this change, the plan liability on the Company's Consolidated Balance Sheet was reduced by $14.0 million in the first quarter of 2014, with the offset increasing other comprehensive income, a component of shareholders' equity. The liability reduction will be recognized in earnings over the average remaining service life of participants.
Note F — Contingencies
Materion Brush Inc., one of the Company's wholly owned subsidiaries, is a defendant from time to time in proceedings where the plaintiffs allege they have contracted chronic beryllium disease (CBD) or related ailments as a result of exposure to beryllium. 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 may be covered by insurance subject to deductibles which vary based on when the exposure occurred. Reserves are recorded for asserted claims only and defense costs are expensed as incurred. One CBD case remains outstanding as of the end of the third quarter of 2015, and the Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.
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 Company’s engineers



8


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


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 $5.0 million at October 2, 2015 and $4.9 million at December 31, 2014. Environmental projects tend to be long term, and the final actual remediation costs may differ from the amounts currently recorded.
Note G — Segment Reporting
 
 
 
 
 
 
 
Other
 
 
(Thousands)
 
Performance
Alloys and
Composites
 
Advanced Materials
 
Other (1)
 
Corporate (2)
 
Subtotal
 
Total
Third Quarter 2015
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
93,566

 
$
113,635

 
$
37,142

 
$
11

 
$
37,153

 
$
244,354

Intersegment sales (3)
 
191

 
15,316

 

 

 

 
15,507

Value-added sales
 
79,596

 
44,520

 
25,671

 
(948
)
 
24,723

 
148,839

Operating profit (loss)
 
4,547

 
6,950

 
2,273

 
(3,611
)
 
(1,338
)
 
10,159

Third Quarter 2014
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
114,208

 
$
137,590

 
$
39,948

 
$
(176
)
 
$
39,772

 
$
291,570

Intersegment sales (3)
 
89

 
15,539

 

 

 

 
15,628

Value-added sales
 
94,681

 
46,083

 
27,037

 
(2,162
)
 
24,875

 
165,639

Operating profit (loss)
 
10,844

 
7,841

 
2,109

 
(3,060
)
 
(951
)
 
17,734

 
 
 
 
 
 
 
 
 
 
 
 
 
First Nine Months 2015
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
304,507

 
$
394,922

 
$
112,024

 
$
(220
)
 
$
111,804

 
$
811,233

Intersegment sales (3)
 
733

 
48,830

 

 

 

 
49,563

Value-added sales
 
256,697

 
142,952

 
75,438

 
(1,258
)
 
74,180

 
473,829

Operating profit (loss)
 
20,677

 
23,289

 
4,512

 
(11,274
)
 
(6,762
)
 
37,204

Assets
 
434,416

 
147,172

 
119,869

 
72,680

 
192,549

 
774,137

First Nine Months 2014
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
321,011

 
$
411,955

 
$
107,935

 
$
(2,436
)
 
$
105,499

 
$
838,465

Intersegment sales (3)
 
502

 
37,666

 

 

 

 
38,168

Value-added sales
 
264,569

 
132,737

 
75,872

 
(3,112
)
 
72,760

 
470,066

Operating profit (loss)
 
23,346

 
25,520

 
6,722

 
(12,362
)
 
(5,640
)
 
43,226

Assets
 
434,181

 
150,374

 
130,265

 
51,988

 
182,253

 
766,808

(1) 
The Other reportable segment includes the results of our Precision Optics and Large Area Coatings operating segments, which do not meet the quantitative thresholds for separate disclosure and are collectively referred to as our Precision Coatings group.
(2) 
Costs associated with our unallocated corporate functions have been shown separately to better illustrate the financial information for the businesses within the Other reportable segment.
(3) 
Intersegment sales are eliminated in consolidation.
Note H — Stock-based Compensation Expense
Stock-based compensation expense was $1.2 million in both the third quarter of 2015 and the third quarter of 2014. Stock-based compensation expense was $5.9 million and $6.4 million in the first nine months of 2015 and 2014, respectively.
The Company granted approximately 56,000 stock-settled restricted stock units (RSUs) during the first nine months of 2015. These shares generally will be amortized over a vesting period of three years, or earlier if the employee is retirement



9


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


eligible as defined in the Plan, using the weighted average fair value per share of $37.25. Additionally, approximately 35,000 cash-settled RSUs were granted to employees during the first nine months of 2015. Because these shares are settled in cash, the liability and related expense were adjusted based on the closing price of Materion’s common stock over the vesting period of three years.
The Company granted approximately 160,000 stock appreciation rights (SARs) to certain employees in the first nine months of 2015 at a strike price of $36.81 per share. The fair value of the SARs, which was determined on the grant date using a Black-Scholes model, was $13.27 per share. The SARs generally will be amortized over the vesting period of three years, or earlier if the employee is retirement eligible as defined in the Plan. The SARs expire seven years from the date of the grant.
Exercises of SARs totaled approximately 67,000 in the first nine months of 2015 and 50,000 in the first nine months of 2014.
The Company granted approximately 77,000 stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first nine months of 2015 at a weighted-average fair value of $33.31 per share. The fair value will be expensed over the vesting period of three years. In addition, approximately 39,000 cash-settled PRSUs were awarded to employees in the first quarter of 2015. The liability for cash-settled PRSUs is remeasured at fair value each reporting period, and the expense is recorded accordingly. The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and the total return to shareholders over the vesting period relative to a peer group’s performance over the same period.
Note I — Other-net
Other-net (income) expense for the third quarter and first nine months of 2015 and 2014 is summarized as follows: 
 
 
Third Quarter Ended
 
Nine Months Ended
 
 
Oct. 2,
 
Sept. 26,
 
Oct. 2,
 
Sept. 26,
(Thousands)
 
2015
 
2014
 
2015
 
2014
Foreign currency exchange/translation (gain) loss
 
$
(1,256
)
 
$
(450
)
 
$
(4,569
)
 
$
25

Amortization of intangible assets
 
1,256

 
1,208

 
3,769

 
3,841

Metal consignment fees
 
1,686

 
1,770

 
5,554

 
5,481

Net (gain) loss on disposal of fixed assets
 
2

 
225

 
310

 
(2,384
)
Recovery from insurance
 

 

 
(3,800
)
 
(6,750
)
Legal settlements
 
(500
)
 
(4,000
)
 
(1,825
)
 
(4,000
)
Other items
 
402

 
603

 
29

 
610

Total
 
$
1,590

 
$
(644
)
 
$
(532
)
 
$
(3,177
)
Note J — Income Taxes
The Company recorded income tax expense of $2.6 million in the third quarter of 2015, an effective tax rate of 27.5% against income before income taxes, and income tax expense of $4.3 million in the third quarter of 2014, with an effective tax rate of 25.5% against income before income taxes.
In the first nine months of 2015, income tax expense was $9.9 million, or 27.9% of income before income taxes, while income tax expense was $11.2 million in the first nine months of 2014, or 27.3% of income before income taxes.
The differences between the statutory and effective rates in the third quarter and first nine months of both years were due to the impact of percentage depletion, the production deduction, foreign source income and deductions, executive compensation, state and local taxes, discrete events, and other factors.



10


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


Note K - Depreciation and Amortization
The Company received an aggregate of $63.5 million from the U.S. Department of Defense (DoD) in previous periods for reimbursement of the DoD's share of the cost of capital equipment acquired by the Company under a Title III contract. The Company recorded the cost of the equipment in property, plant, and equipment and the reimbursements as unearned income, a liability on the Consolidated Balance Sheets. The equipment was placed in service during the third quarter of 2012, and its full cost is being depreciated in accordance with Company policy. The unearned income liability is being reduced ratably with the depreciation expense recorded over the life of the equipment.
In the first nine months of 2015, the depreciation expense reimbursed for this equipment was $4.7 million. Unearned income was reduced by $4.7 million, accordingly, with the offset recorded as a credit to cost of sales. Depreciation, depletion, and amortization expense on the Consolidated Statements of Cash Flows is shown net of the reduction in unearned income.

Note L — Fair Value of Financial Instruments
The Company measures and records financial instruments at fair value. 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 Company’s 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.
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheet as of October 2, 2015: 
 
 
 
 
Fair Value Measurements
(Thousands)
 
Total
 
Quoted Prices
in  Active
Markets  for
Identical
Assets
(Level  1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Financial Assets
 
 
 
 
 
 
 
 
Deferred compensation investments
 
$
2,429

 
$
2,407

 
$
22

 
$

Foreign currency forward contracts
 
1,001

 

 
1,001

 

Total
 
$
3,430

 
$
2,407

 
$
1,023

 
$

Financial Liabilities
 
 
 
 
 
 
 
 
Deferred compensation liability
 
$
2,466

 
$
2,466

 
$

 
$

Foreign currency forward contracts
 
368

 

 
368

 

Total
 
$
2,834

 
$
2,466

 
$
368

 
$

The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The carrying values of the other working capital items and debt in the Consolidated Balance Sheet approximate fair values as of October 2, 2015.



11


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


Note M — Derivative Instruments and Hedging Activity
The Company uses derivative contracts to hedge portions of its foreign currency exposures and may also use derivatives to hedge a portion of its precious metal exposures. The objectives and strategies for using derivatives in these areas are as follows:
Foreign Currency.    The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures 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 the dollar value of 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, hedge contracts 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 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 Audit Committee of 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.
Precious Metals.    The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions who charge the Company a financing fee based upon the current value of the metal on hand.
In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.
The Company refines precious metal containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal.
The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.



12


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


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 and precious metal hedge contracts denominated in the same metal 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 derivative’s 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 $31.0 million as of October 2, 2015. All of these contracts were designated and effective as cash flow hedges. The net fair value of the outstanding contracts was $0.6 million, with an asset recorded in prepaid expenses and other assets and a liability recorded in other liabilities and accrued items on the Consolidated Balance Sheet as of October 2, 2015.
No ineffective expense was recorded in the third quarter or first nine months of 2015 or 2014.
Changes in the fair value of outstanding cash flow hedges recorded in OCI for the first nine months of 2015 and 2014 totaled $2.2 million and $2.4 million, respectively. The Company expects to relieve substantially the entire balance in OCI as of October 2, 2015 to the Consolidated Statements of Income during the twelve-month period beginning October 3, 2015. Refer to Note N for additional OCI details.
Note N — Accumulated Other Comprehensive Income

Changes in the components of accumulated other comprehensive income, including the amounts reclassified out, for the third quarter and first nine months of 2015 and 2014 are as follows:
 
 
Gains and Losses
On Cash Flow Hedges
 
 
 
 
 
 
(Thousands)
 
Foreign Currency
 
Precious Metals
 
Total
 
Pension and Post-Employment Benefits
 
Foreign Currency Translation
 
Total
Accumulated other comprehensive income, as of July 3, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 Gross
 
$
2,503

 
$

 
$
2,503

 
$
(106,276
)
 
$
(5,407
)
 
$
(109,180
)
 Deferred tax expense (benefit)
 
(474
)
 

 
(474
)
 
(26,418
)
 

 
(26,892
)
 Net
 
$
2,977

 
$

 
$
2,977

 
$
(79,858
)
 
$
(5,407
)
 
$
(82,288
)
Third quarter 2015 activity
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
$
(447
)
 
$

 
$
(447
)
 
$

 
$
359

 
$
(88
)
Amounts reclassified from accumulated other comprehensive income
 
(1,423
)
 

 
(1,423
)
 
1,396

 

 
(27
)
Net current period other comprehensive income (loss) before tax
 
(1,870
)
 

 
(1,870
)
 
1,396

 
359

 
(115
)
Deferred taxes on current period activity
 
(693
)
 

 
(693
)
 
495

 

 
(198
)
Net current period other comprehensive income (loss) after tax
 
$
(1,177
)
 
$

 
$
(1,177
)
 
$
901

 
$
359

 
$
83

Accumulated other comprehensive income, as of October 2, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 Gross
 
$
633

 
$

 
$
633

 
$
(104,880
)
 
$
(5,048
)
 
$
(109,295
)
 Deferred tax expense (benefit)
 
(1,167
)
 

 
(1,167
)
 
(25,923
)
 

 
(27,090
)
 Net
 
$
1,800

 
$

 
$
1,800

 
$
(78,957
)
 
$
(5,048
)
 
$
(82,205
)
 
 
 
 
 
 
 
 
 
 
 
 
 



13


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


 
 
Gains and Losses
On Cash Flow Hedges
 
 
 
 
 
 
(Thousands)
 
Foreign Currency
 
Precious Metals
 
Total
 
Pension and Post-Employment Benefits
 
Foreign Currency Translation
 
Total
Accumulated other comprehensive income, as of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Gross
 
$
3,456

 
$

 
$
3,456

 
$
(109,080
)
 
$
(4,153
)
 
$
(109,777
)
Deferred tax expense (benefit)
 
(122
)
 

 
(122
)
 
(27,418
)
 

 
(27,540
)
Net
 
$
3,578

 
$

 
$
3,578

 
$
(81,662
)
 
$
(4,153
)
 
$
(82,237
)
 
 
 
 
 
 
 
 
 
 
 
 
 
First nine months of 2015 activity
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
$
2,198

 
$

 
$
2,198

 
$
14

 
$
(895
)
 
$
1,317

Amounts reclassified from accumulated other comprehensive income
 
(5,021
)
 

 
(5,021
)
 
4,186

 

 
(835
)
Net current period other comprehensive income (loss) before tax
 
(2,823
)
 

 
(2,823
)
 
4,200

 
(895
)
 
482

Deferred taxes on current period activity
 
(1,045
)
 

 
(1,045
)
 
1,495

 

 
450

Net current period other comprehensive income (loss) after tax
 
$
(1,778
)
 
$

 
$
(1,778
)
 
$
2,705

 
$
(895
)
 
$
32

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, as of October 2, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Gross
 
$
633

 
$

 
$
633

 
$
(104,880
)
 
$
(5,048
)
 
$
(109,295
)
Deferred tax expense (benefit)
 
(1,167
)
 

 
(1,167
)
 
(25,923
)
 

 
(27,090
)
Net
 
$
1,800

 
$

 
$
1,800

 
$
(78,957
)
 
$
(5,048
)
 
$
(82,205
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, as of June 27, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Gross
 
$
31

 
$

 
$
31

 
$
(61,597
)
 
$
1,002

 
$
(60,564
)
Deferred tax expense (benefit)
 
(1,390
)
 

 
(1,390
)
 
(10,013
)
 

 
(11,403
)
Net
 
$
1,421

 
$

 
$
1,421

 
$
(51,584
)
 
$
1,002

 
$
(49,161
)
Third quarter 2014 activity
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
$
2,365

 
$

 
$
2,365

 
$

 
$
(2,170
)
 
$
195

Amounts reclassified from accumulated other comprehensive income
 
(17
)
 

 
(17
)
 
833

 

 
816

Net current period other comprehensive income (loss) before tax
 
2,348

 

 
2,348

 
833

 
(2,170
)
 
1,011

Deferred taxes on current period activity
 
868

 

 
868

 
293

 

 
1,161

Net current period other comprehensive income (loss) after tax
 
$
1,480

 
$

 
$
1,480

 
$
540

 
$
(2,170
)
 
$
(150
)
Accumulated other comprehensive income, as of September 26, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Gross
 
$
2,379

 
$

 
$
2,379

 
$
(60,764
)
 
$
(1,168
)
 
$
(59,553
)
Deferred tax expense (benefit)
 
(522
)
 

 
(522
)
 
(9,720
)
 

 
(10,242
)
Net
 
$
2,901

 
$

 
$
2,901

 
$
(51,044
)
 
$
(1,168
)
 
$
(49,311
)
 
 
 
 
 
 
 
 
 
 
 
 
 



14


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


 
 
Gains and Losses
On Cash Flow Hedges
 
 
 
 
 
 
(Thousands)
 
Foreign Currency
 
Precious Metals
 
Total
 
Pension and Post-Employment Benefits
 
Foreign Currency Translation
 
Total
Accumulated other comprehensive income, as of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Gross
 
$
(87
)
 
$
(19
)
 
$
(106
)
 
$
(77,301
)
 
$
287

 
$
(77,120
)
Deferred tax expense (benefit)
 
(1,433
)
 
(7
)
 
(1,440
)
 
(15,792
)
 

 
(17,232
)
Net
 
$
1,346

 
$
(12
)
 
$
1,334

 
$
(61,509
)
 
$
287

 
$
(59,888
)
First nine months of 2014 activity
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
$
2,357

 
$

 
$
2,357

 
$
14,034

 
$
(1,455
)
 
$
14,936

Amounts reclassified from accumulated other comprehensive income
 
109

 
19

 
128

 
2,503

 

 
2,631

Net current period other comprehensive income (loss) before tax
 
2,466

 
19

 
2,485

 
16,537

 
(1,455
)
 
17,567

Deferred taxes on current period activity
 
911

 
7

 
918

 
6,072

 

 
6,990

Net current period other comprehensive income (loss) after tax
 
$
1,555

 
$
12

 
$
1,567

 
$
10,465

 
$
(1,455
)
 
$
10,577

 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income, as of September 26, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Gross
 
$
2,379

 
$

 
$
2,379

 
$
(60,764
)
 
$
(1,168
)
 
$
(59,553
)
Deferred tax expense (benefit)
 
(522
)
 

 
(522
)
 
(9,720
)
 

 
(10,242
)
Net
 
$
2,901

 
$

 
$
2,901

 
$
(51,044
)
 
$
(1,168
)
 
$
(49,311
)
Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Other-net in the Consolidated Statements of Income. Gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income in order to offset the impact of precious metal price movements in Cost of sales. The Company has no precious metal hedges as of October 2, 2015. Refer to Note M for additional details on cash flow hedges.
Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note E for additional details on pension and post-employment expenses.



15



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OUR BUSINESS
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 end markets, including consumer electronics, industrial components, medical, automotive electronics, energy, telecommunications infrastructure, and defense.

EXECUTIVE OVERVIEW
For the third quarter and first nine months of 2015, the following key factors contributed to our overall results of operations, financial position, and cash flows:
Net sales in the third quarter of 2015 were $244.4 million, a 16% decrease from net sales in the third quarter of 2014. The decrease was due primarily to the impact of lower sales volume, lower pass-through precious metal and copper prices, and the negative impact of foreign exchange rates.

Value-added sales decreased 10% to $148.8 million in the third quarter of 2015 compared to $165.6 million in the third quarter of 2014. The impact of foreign exchange rate movements of $2.4 million negatively impacted value-added sales in the third quarter of 2015 by 1% compared to the third quarter of 2014. Value-added sales is a non-GAAP measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in pass-through metal prices. Internally, we manage our business on this basis, and a reconciliation of sales to value-added sales is included herein.

Gross margin was $44.0 million in the third quarter of 2015 compared to $54.8 million in the third quarter of 2014. The decrease is due to a combination of lower sales volume and unfavorable product mix. In the third quarter of 2015, we also recorded $0.6 million of expense primarily for headcount reductions in our Precision Coatings group within our Other reportable segment to respond to weakening demand in the projector display segment of the consumer electronics end market.

Operating profit was $10.2 million in the third quarter of 2015 compared to $17.7 million in the third quarter of 2014. Operating profit for the third quarter of 2014 was adjusted to correct an error related to amortization of stock compensation expense (refer to Note B in the Consolidated Financial Statements for further details). The decrease in the third quarter of 2015 was due to lower gross margins of $10.8 million and a $2.2 million unfavorable change in Other-net, partially offset by lower selling, general, and administrative (SG&A) expense of $4.8 million. The unfavorable change in Other-net was primarily driven by a $4.0 million gain on a legal settlement recognized in the third quarter of 2014. The decrease in SG&A was due primarily to lower annual incentive compensation expense and lower selling expenses, partially offset by $1.2 million of expense related to headcount reductions in our Precision Coatings group within our Other reportable segment and the elimination of executive positions in the third quarter of 2015.

As a result of the aforementioned factors, overall diluted earnings per share decreased to $0.34 for the three months ended October 2, 2015 as compared to $0.61 for the three months ended September 26, 2014. For the first nine months of 2015, the overall diluted earnings per share decreased to $1.24 versus $1.42 for the same period in 2014.

A total of 140,290 shares of common stock were repurchased in the third quarter of 2015 for $4.4 million in the aggregate. Since the approval of a $50.0 million common stock repurchase plan by our Board of Directors in January 2014, we have purchased 902,504 shares at a total cost of $29.4 million.



16



RESULTS OF OPERATIONS
 
 
Third Quarter Ended
 
Nine Months Ended
 
 
Oct. 2,
 
Sept. 26,
 
$
 
%
 
Oct. 2,
 
Sept. 26,
 
$
 
%
(Millions, except per share data)
 
2015
 
2014
 
Change
 
Change
 
2015
 
2014
 
Change
 
Change
Net sales
 
$
244.4

 
$
291.6

 
$
(47.2
)
 
(16
)%
 
$
811.2

 
$
838.5

 
$
(27.3
)
 
(3
)%
Value-added sales
 
148.8

 
165.6

 
(16.8
)
 
(10
)%
 
473.8

 
470.1

 
3.7

 
1
 %
Gross margin
 
44.0

 
54.8

 
(10.8
)
 
(20
)%
 
147.7

 
150.1

 
(2.4
)
 
(2
)%
SG&A expense
 
29.7

 
34.5

 
(4.8
)
 
(14
)%
 
101.6

 
100.6

 
1.0

 
1
 %
R&D expense
 
2.5

 
3.2

 
(0.7
)
 
(22
)%
 
9.4

 
9.5

 
(0.1
)
 
(1
)%
Other—net
 
1.6

 
(0.6
)
 
2.2

 
(367
)%
 
(0.5
)
 
(3.2
)
 
2.7

 
(84
)%
Operating profit
 
10.2

 
17.7

 
(7.5
)
 
(42
)%
 
37.2

 
43.2

 
(6.0
)
 
(14
)%
Interest expense—net
 
0.6

 
0.7

 
(0.1
)
 
(14
)%
 
1.9

 
2.1

 
(0.2
)
 
(10
)%
Income before income taxes
 
9.6

 
17.0

 
(7.4
)
 
(44
)%
 
35.3

 
41.1

 
(5.8
)
 
(14
)%
Income tax expense
 
2.7

 
4.4

 
(1.7
)
 
(39
)%
 
9.9

 
11.2

 
(1.3
)
 
(12
)%
Net income
 
$
6.9

 
$
12.6

 
$
(5.7
)
 
(45
)%
 
$
25.4

 
$
29.9

 
$
(4.5
)
 
(15
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.34

 
$
0.61

 
$
(0.27
)
 
(44
)%
 
$
1.24

 
$
1.42

 
$
(0.18
)
 
(13
)%

Third Quarter

Net sales of $244.4 million in the third quarter of 2015 were $47.2 million lower than the $291.6 million recorded in the third quarter of 2014. The decrease in net sales in the third quarter of 2015 was due to lower sales volume, lower pass-through precious metal and copper prices, and the negative impact of foreign exchange rates. Sales volu