UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
(Mark One)
 
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2017June 28, 2019
 
¨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 Heights, Ohio44124
(Address of principal executive offices)(Zip
6070 Parkland Blvd., Mayfield Heights, Ohio44124
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
216-486-4200(216)-486-4200

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueMTRNNew York Stock Exchange
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.  Yesþ       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).  Yesþ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerþ Accelerated filer  ¨
Large accelerated filer  þ
Accelerated filer  ¨
   Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
Non-accelerated filer  ¨ Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No  þ


Number of Shares of Common Stock, without par value, outstanding at September 29, 2017: 20,043,474.June 28, 2019: 20,399,425.







PART I1 - FINANCIAL INFORMATION
MATERION CORPORATION AND SUBSIDIARIES
Item 1.
Item 1. Financial Statements
The consolidated financial statements of Materion Corporation and its subsidiaries for the third quarter and nine months ended September 29, 2017 are as follows:
Third quarter and nine months ended September 29, 2017 and September 30, 2016

Third quarter and nine months ended September 29, 2017 and September 30, 2016


September 29, 2017 and December 31, 2016
Nine months ended September 29, 2017 and September 30, 2016




1




Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 Third Quarter Ended Nine Months Ended
 Sept. 29, Sept. 30, Sept. 29, Sept. 30, Second Quarter Ended Six Months Ended
(Thousands, except per share amounts) 2017 2016 2017 2016 June 28, 2019 June 29, 2018 June 28, 2019 June 29, 2018
Net sales $294,268
 $249,619
 $830,779
 $734,906
 $297,843
 $309,085
 $599,284
 $612,552
Cost of sales 239,065
 198,864
 678,023
 595,488
 228,249
 247,247
 460,378
 492,434
Gross margin 55,203
 50,755
 152,756
 139,418
 69,594
 61,838
 138,906
 120,118
Selling, general, and administrative expense 36,415
 34,177
 108,118
 97,101
 39,891
 38,473
 79,955
 76,935
Research and development expense 3,429
 3,237
 10,103
 9,860
 4,062
 3,860
 7,802
 7,503
Other—net 3,801
 3,190
 9,823
 8,997
 2,891
 4,313
 7,012
 7,237
Operating profit 11,558
 10,151
 24,712
 23,460
 22,750
 15,192
 44,137
 28,443
Interest expense—net 533
 490
 1,721
 1,417
 500
 667
 966
 1,397
Other non-operating expense—net 3,112
 437
 3,357
 879
Income before income taxes 11,025
 9,661
 22,991
 22,043
 19,138
 14,088
 39,814
 26,167
Income tax expense 1,705
 1,616
 3,308
 3,081
 3,598
 2,944
 7,368
 4,459
Net income $9,320
 $8,045
 $19,683
 $18,962
 $15,540
 $11,144
 $32,446
 $21,708
Basic earnings per share:                
Net income per share of common stock $0.47
 $0.40
 $0.98
 $0.95
 $0.76
 $0.55
 $1.60
 $1.08
Diluted earnings per share:                
Net income per share of common stock $0.46
 $0.40
 $0.97
 $0.94
 $0.75
 $0.54
 $1.57
 $1.05
Cash dividends per share $0.100
 $0.095
 $0.295
 $0.280
Weighted-average number of shares of common stock outstanding:                
Basic 20,040
 19,957
 20,007
 19,996
 20,383
 20,221
 20,326
 20,178
Diluted 20,411
 20,192
 20,361
 20,209
 20,666
 20,593
 20,635
 20,583







































The accompanyingSee notes are an integral part of theto these consolidated financial statements.








2





Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 Third Quarter Ended Nine Months Ended Second Quarter Ended Six Months Ended
 Sept. 29, Sept. 30, Sept. 29, Sept. 30, June 28, June 29, June 28, June 29,
(Thousands) 2017 2016 2017 2016 2019 2018 2019 2018
Net income $9,320
 $8,045
 $19,683
 $18,962
 $15,540
 $11,144
 $32,446
 $21,708
Other comprehensive income (loss):                
Foreign currency translation adjustment 271
 467
 1,649
 2,918
 339
 (944) (164) 169
Derivative and hedging activity, net of tax (120) 132
 (755) (489) (1,000) 1,763
 (73) 1,088
Pension and post-employment benefit adjustment, net of tax 881
 673
 2,397
 2,923
 13,953
 1,296
 14,493
 2,574
Other comprehensive income 1,032
 1,272
 3,291
 5,352
 13,292
 2,115
 14,256
 3,831
Comprehensive income $10,352
 $9,317
 $22,974
 $24,314
 $28,832
 $13,259
 $46,702
 $25,539








































































The accompanying

See notes are an integral part of theto these consolidated financial statements.







3





Materion Corporation and Subsidiaries
Consolidated Balance Sheets
  (Unaudited)  
  June 28, Dec. 31,
(Thousands) 2019 2018
Assets    
Current assets    
Cash and cash equivalents $74,856
 $70,645
Accounts receivable 142,327
 130,538
Inventories, net 213,329
 214,871
Prepaid and other current assets 23,904
 23,299
Total current assets 454,416
 439,353
Deferred income taxes 1,052
 5,616
Property, plant, and equipment 913,325
 898,251
Less allowances for depreciation, depletion, and amortization (669,861) (647,233)
Property, plant, and equipment—net 243,464
 251,018
Operating lease, right-of-use asset 26,788
 
Intangible assets 5,213
 6,461
Other assets 15,280
 7,236
Goodwill 90,633
 90,657
Total Assets $836,846
 $800,341
Liabilities and Shareholders’ Equity    
Current liabilities    
Short-term debt $847
 $823
Accounts payable 41,658
 49,622
Salaries and wages 36,250
 47,501
Other liabilities and accrued items 38,482
 33,301
Income taxes

 1,971
 2,615
Unearned revenue 5,829
 5,918
Total current liabilities 125,037
 139,780
Other long-term liabilities 11,419
 14,764
Operating lease liabilities 21,118
 
Finance lease liabilities 18,325
 15,221
Retirement and post-employment benefits 30,663
 38,853
Unearned income 30,354
 32,563
Long-term income taxes 3,093
 2,993
Deferred income taxes 383
 195
Long-term debt 1,669
 2,066
Shareholders’ equity    
Serial preferred stock (no par value; 5,000 authorized shares, none issued) 
 
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at June 28 and December 31) 245,785
 234,704
Retained earnings 576,211
 548,374
Common stock in treasury (187,224) (175,426)
Accumulated other comprehensive loss (43,978) (58,234)
Other equity 3,991
 4,488
Total shareholders' equity 594,785
 553,906
Total Liabilities and Shareholders’ Equity $836,846
 $800,341
  (Unaudited)  
  Sept. 29, Dec. 31,
(Thousands) 2017 2016
Assets    
Current assets    
Cash and cash equivalents $22,486
 $31,464
Accounts receivable 125,417
 100,817
Inventories 220,223
 200,865
Prepaid and other current assets 19,115
 12,138
Total current assets 387,241
 345,284
Long-term deferred income taxes 40,332
 39,409
Property, plant, and equipment 877,002
 861,267
Less allowances for depreciation, depletion, and amortization (632,435) (608,636)
Property, plant, and equipment—net 244,567
 252,631
Intangible assets 10,771
 11,074
Other assets 6,312
 5,950
Goodwill 89,720
 86,950
Total Assets $778,943
 $741,298
Liabilities and Shareholders’ Equity    
Current liabilities    
Short-term debt $767
 $733
Accounts payable 44,678
 32,533
Salaries and wages 30,889
 29,885
Other liabilities and accrued items 27,950
 21,340
Income taxes 2,953
 4,781
Unearned revenue 5,859
 1,105
Total current liabilities 113,096
 90,377
Other long-term liabilities 18,968
 17,979
Retirement and post-employment benefits 92,014
 91,505
Unearned income 37,991
 41,369
Long-term income taxes 1,593
 2,100
Deferred income taxes 279
 274
Long-term debt 3,010
 3,605
Shareholders’ equity    
Serial preferred stock 
 
Common stock 219,817
 212,702
Retained earnings 531,683
 517,903
Common stock in treasury (161,030) (154,399)
Accumulated other comprehensive loss (82,890) (86,181)
Other equity transactions 4,412
 4,064
Total shareholders' equity 511,992
 494,089
Total Liabilities and Shareholders’ Equity $778,943
 $741,298

The accompanying



See the notes are an integral part of theto these consolidated financial statements.







4





Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended Six Months Ended
 Sept. 29, Sept. 30, June 28, June 29,
(Thousands) 2017 2016 2019 2018
Cash flows from operating activities:        
Net income $19,683
 $18,962
 $32,446
 $21,708
Adjustments to reconcile net income to net cash provided from (used in) operating activities:    
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Depreciation, depletion, and amortization 33,444
 34,379
 22,607
 18,349
Amortization of deferred financing costs in interest expense 670
 417
 472
 514
Stock-based compensation expense (non-cash) 4,303
 2,880
 3,541
 2,164
(Gain) loss on sale of property, plant, and equipment 207
 (601)
Deferred income tax expense (benefit) 1,073
 (676)
Changes in assets and liabilities net of acquired assets and liabilities:   
Deferred income tax expense 4,578
 429
Pension curtailment charge 3,296
 
Changes in assets and liabilities:   
Decrease (increase) in accounts receivable (21,572) (19,781) (11,778) (12,060)
Decrease (increase) in inventory (9,953) 3,294
 1,306
 10,428
Decrease (increase) in prepaid and other current assets (6,077) (956) (588) 4,928
Increase (decrease) in accounts payable and accrued expenses 17,991
 (2,207) (18,813) (14,189)
Increase (decrease) in unearned revenue 4,746
 (2,546) (88) 2,132
Increase (decrease) in interest and taxes payable (2,083) 898
 (1,130) 2,084
Increase (decrease) in long-term liabilities (5,611) (9,320)
Domestic pension plan contributions (3,000) (13,000)
Other-net (1,324) 2,479
 (2,803) 5,817
Net cash provided by operating activities 35,497
 27,222
 30,046
 29,304
Cash flows from investing activities:        
Payments for purchase of property, plant, and equipment (17,759) (20,052) (13,833) (17,153)
Payments for mine development (620) (8,934) (1,591) (3,425)
Payments for acquisition (16,504) 
Proceeds from sale of property, plant, and equipment 53
 1,366
 15
 27
Net cash used in investing activities (34,830) (27,620) (15,409) (20,551)
Cash flows from financing activities:        
Proceeds from issuance of short-term debt, net 
 3,777
Proceeds from issuance of long-term debt 55,000
 10,000
Repayment of long-term debt (55,608) (10,517) (397) (383)
Principal payments under capital lease obligations (644) (549)
Principal payments under finance lease obligations (599) (425)
Cash dividends paid (5,903) (5,601) (4,368) (4,137)
Deferred financing costs (300) (1,000)
Common shares withheld for taxes (2,397) (868)
Repurchase of common stock (1,086) (3,798) (199) 
Payments of withholding taxes for stock-based compensation awards (4,763) (2,765)
Net cash used in financing activities (10,938) (8,556) (10,326) (7,710)
Effects of exchange rate changes 1,293
 524
 (100) 8
Net change in cash and cash equivalents (8,978) (8,430) 4,211
 1,051
Cash and cash equivalents at beginning of period 31,464
 24,236
 70,645
 41,844
Cash and cash equivalents at end of period $22,486
 $15,806
 $74,856
 $42,895


The accompanying






See notes are an integral part of theto these consolidated financial statements.






5




Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements of Shareholders' Equity
(Unaudited)


 Common Shares Shareholders' Equity
(Thousands, except per share amounts)Common Shares Common Shares Held in Treasury Common
Stock
 Retained
Earnings
 Common
Stock in
Treasury
 Accumulated Other
Comprehensive
Income (Loss)
 Other
Equity
 Total
Balance at March 29, 201920,354
 (6,794) $241,480
 $562,941
 $(184,812) $(57,270) $4,538
 $566,877
Net income
 
 
 15,540
 
 
 
 15,540
Other comprehensive income (loss)
 
 
 
 
 9,996
 
 9,996
Pension curtailment
 
 
 
 
 3,296
 
 3,296
Cash dividends declared ($0.11 per share)
 
 
 (2,243) 
 
 
 (2,243)
Stock-based compensation activity55
 55
 4,287
 (27) (2,266) 
 
 1,994
Payments of withholding taxes for stock-based compensation awards(12) (12) 
 
 (785) 
 
 (785)
Repurchase of shares
 
 
 
 
 
 
 
Directors’ deferred compensation2
 2
 18
 
 639
 
 (547) 110
Balance at June 28, 201920,399
 (6,749) $245,785
 $576,211
 $(187,224) $(43,978) $3,991
 $594,785
                
Balance at March 30, 201820,191
 (6,958) $227,694
 $545,093
 $(171,574) $(101,221) $4,337
 $504,329
Net income
 
 
 11,144
 
 
 
 11,144
Other comprehensive income (loss)
 
 
 
 
 1,540
 
 1,540
Tax Cuts and Jobs Act Reclassification
 
 
 (575) 
 575
 
 
Cumulative effect of accounting change
 
 
 
 
 
 
 
Cash dividends declared ($0.105 per share)
 
 
 (2,125) 
 
 
 (2,125)
Stock-based compensation activity55
 55
 3,020
 (14) (1,613) 
 
 1,393
Payments of withholding taxes for stock-based compensation awards(11) (11) 
 
 (632) 
 
 (632)
Directors’ deferred compensation1
 2
 49
 
 (6) 
 49
 92
Balance at June 29, 201820,236
 (6,912) $230,763
 $553,523
 $(173,825) $(99,106) $4,386
 $515,741







6



 Common Shares Shareholders' Equity
(Thousands, except per share amounts)Common Shares Common Shares Held in Treasury Common
Stock
 Retained
Earnings
 Common
Stock in
Treasury
 Accumulated Other
Comprehensive
Income (Loss)
 Other
Equity
 Total
Balance at December 31, 201820,242
 (6,906) $234,704
 $548,374
 $(175,426) $(58,234) $4,488
 $553,906
Net income
 
 
 32,446
 
 
 
 32,446
Other comprehensive income (loss)
 
 
 
 
 10,960
 
 10,960
Pension curtailment
 
 
 
 
 3,296
 
 3,296
Cumulative effect of accounting change
 
 
 (179) 
 
 
 (179)
Cash dividends declared ($0.215 per share)
 
 
 (4,368) 
 
 
 (4,368)
Stock-based compensation activity247
 247
 11,046
 (62) (7,443) 
 
 3,541
Payments of withholding taxes for stock-based compensation awards(87) (87) 
 
 (4,763) 
 
 (4,763)
Repurchase of shares(5) (5) 
 
 (199) 
 
 (199)
Directors’ deferred compensation2
 2
 35
 
 607
 
 (497) 145
Balance at June 28, 201920,399
 (6,749) $245,785
 $576,211
 $(187,224) $(43,978) $3,991
 $594,785
                
Balance at December 31, 201720,107
 (7,042) $223,484
 $536,116
 $(166,128) $(102,937) $4,446
 $494,981
Net income
 
 
 21,708
 
 
 
 21,708
Other comprehensive income (loss)
 
 
 
 
 3,256
 
 3,256
Tax Cuts and Jobs Act Reclassification
 
 
 (575) 
 575
 
 
Cumulative effect of accounting change
 
 
 425
 
 
 
 425
Cash dividends declared ($0.205 per share)
 
 
 (4,137) 
 
 
 (4,137)
Stock-based compensation activity181
 181
 7,220
 (14) (5,042) 
 
 2,164
Payments of withholding taxes for stock-based compensation awards(53) (53) 
 
 (2,765) 
 
 (2,765)
Directors’ deferred compensation1
 2
 59
 
 110
 
 (60) 109
Balance at June 29, 201820,236
 (6,912) $230,763
 $553,523
 $(173,825) $(99,106) $4,386
 $515,741

















See notes to these consolidated financial statements.

Note A — Accounting Policies


(Dollars in thousands)
Basis of Presentation:In management’s opinion, the accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature. Certain amounts in prior yearsperiods have been reclassified to conform to the 20172019 consolidated financial statement presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 20162018 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.
Business Combinations: The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
The amounts reflected in Note B to the Consolidated Financial Statements are the results of the preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.
New Pronouncements Adopted: In MarchFebruary 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting2016-02 (Topic 842), Leases, which impacts several aspects ofeliminates the off-balance-sheet accounting for share-based payment transactions, including income tax consequences, classification of awardsleases. This guidance requires lessees to report their operating leases as either equity or liabilities,both an asset and classificationliability on the statementbalance sheet and disclose key information about leasing arrangements. The Company adopted this guidance as of cash flows. UnderJanuary 1, 2019 using the modified retrospective method and applied it retrospectively through a cumulative-effect adjustment to retained earnings. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification, and initial direct costs of leases commencing before this ASU's effective date; however, the Company did not elect the hindsight transitional practical expedient. The Company also applied the practical expedient to not separate lease and non-lease components to new standard, income tax benefits and deficiencies are to be recognizedleases as income tax expense or benefit in the income statement, and the tax effects of exercised or vested awards will be treatedwell as discrete items in the reporting period in which they occur. An entity will also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the reporting period. Excess tax benefits will be classified, along with other income tax cash flows, asexisting leases through transition. The Company made an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election not to either estimateapply recognition requirements of the number of awards thatguidance to short-term leases.

Results for reporting periods beginning after January 1, 2019 are expected to vest or account for forfeitures as they occur. The ASU, which is requiredpresented under Topic 842, while prior period amounts are not adjusted and continue to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016. reported in accordance with legacy generally accepted accounting principles.

The Company adoptedrecorded a net reduction to opening retained earnings of $0.2 million as of January 1, 2019 due to the new guidance during the first quarter of 2017. Ancumulative impact of adoption wasadopting Topic 842, with the recognitionimpact primarily related to derecognition of excess tax benefits in Income tax expense rather than Shareholders' equity in 2017. As a result, the Company recognized discrete tax benefits of $129 and $503 in Income tax expense during the third quarter and first nine months of 2017, respectively. The cash flow classification requirements of ASU 2016-09 were applied retrospectively. As a result,built-to-suit lease. Refer to Note H for the nine months ended September 30, 2016, cash flows from operating activities increased by $868 with a corresponding decreaseadditional disclosures relating to cash flows from financing activities. None of the other provisions in this ASU had a material effect on the Company's consolidated financial statements.leasing arrangements.
New Pronouncements Issued: In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The Company adopted this guidance as of January 1, 2019, and the adoption did not have a material effect on the Company’s consolidated financial statements.

New Pronouncements Issued: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. This ASU isrequires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard will be effective for fiscal years beginning after December 15, 2018,2019, including interim periods within those periods, with earlysuch fiscal years. Early adoption is permitted. The Company is currently evaluatingassessing the impact of adoptingeffect that this new guidanceASU will have on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentationposition, results of Net Periodic Pension Costoperations, and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments also allow only the service cost component to be eligible for capitalization. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within



6


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


those periods, with early adoption permitted. The amendments should be applied retrospectively for the presentation of service cost and other components of net benefit cost on the income statement and prospectively for the capitalization of service cost and net periodic postretirement benefits in assets. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which eliminates the off-balance-sheet accounting for leases. The new guidance will require lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this new guidance on its 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 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. To evaluate the impact of adopting this new guidance on the consolidated financial statements, the Company established a cross-functional implementation team to assess its revenue streams against the requirements of this ASU. In addition, the Company is in the process of identifying and implementing changes to its processes and controls to meet the standard's updated reporting and disclosure requirements. The Company plans to adopt the standard as of the first quarter of 2018 using the modified retrospective approach and will record a cumulative-effect adjustment to equity for open contracts as of January 1, 2018. The Company continues to update its assessment of the impact of the standard and related updates to its consolidated financial statements, and will disclose material impacts, if any.disclosures.
No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

Note B — Acquisitions

On February 28, 2017, the Company acquired the target materials business of the Heraeus Group (HTB), of Hanau, Germany, for $16.5 million. This business manufactures precious and non-precious metal target materials for the architectural and automotive glass, electronic display, photovoltaic, and semiconductor markets at facilities in Germany, Taiwan, and the United States. This business operates within the Advanced Materials segment, and the results of operations are included as of the date of acquisition.



7


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


The Company will make adjustments to the purchase price allocation prior to completion of the measurement period, as necessary. Only items identified as of the acquisition date will be considered for subsequent adjustment. The purchase price allocation for the acquisition is as follows:
(Thousands)Amount
Assets: 
Inventories$7,221
Prepaid and other current assets1,107
Long-term deferred income taxes1,450
Property, plant, and equipment7,637
Intangible assets3,236
Goodwill2,605
Total assets acquired$23,256
  
Liabilities: 
Other liabilities and accrued items$1,030
Other long-term liabilities430
Retirement and post-employment benefits5,292
Total liabilities assumed$6,752
  
Total purchase price$16,504

As part of the acquisition, the Company recorded approximately $2.6 million of goodwill. Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired. Also, the Company acquired approximately $3.2 million of other intangible assets, which will be amortized using the straight-line method over an average life of about ten years. The following table reports the intangible assets by asset category and useful life:

(Thousands) Value at Acquisition Useful Life
Customer relationships $1,861
 15 years
Technology 1,375
 3 years
Total $3,236
  


Note CB — Segment Reporting
 
The Company has the following operatingreportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Company’s operatingreportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance.
Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, beryllia ceramics, and bulk metallic glass materials.



7


Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.
Precision Coatings produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.



8


The Other reportable segment includes unallocated corporate costs and assets.


(Thousands) 
Performance
Alloys and
Composites
 Advanced Materials Precision Coatings Other Total
Second Quarter 2019          
Net sales $135,231
 $133,238
 $29,374
 $
 $297,843
Intersegment sales 
 6
 19,260
 
 
 19,266
Operating profit (loss) 19,328
 6,139
 3,937
 (6,654) 22,750
Second Quarter 2018          
Net sales $129,765
 $150,324
 $28,996
 $
 $309,085
Intersegment sales 3
 11,400
 
 
 11,403
Operating profit (loss) 12,309
 5,572
 2,233
 (4,922) 15,192
           
First Six Months 2019          
Net sales $262,344
 $277,263
 $59,677
 $
 $599,284
Intersegment sales 15
 36,473
 
 
 36,488
Operating profit (loss) 38,286
 13,219
 6,014
 (13,382) 44,137
First Six Months 2018          
Net sales $248,001
 $303,869
 $60,682
 $
 $612,552
Intersegment sales 31
 23,052
 
 
 23,083
Operating profit (loss) 22,170
 11,470
 5,608
 (10,805) 28,443





8

(Thousands) 
Performance
Alloys and
Composites
 Advanced Materials Precision Coatings Other Total
Third Quarter 2017          
Net sales $109,393
 $157,770
 $27,105
 $
 $294,268
Intersegment sales 
 54
 12,814
 
 
 12,868
Value-added sales 90,637
 60,391
 21,896
 (1,542) 171,382
Operating profit (loss) 6,786
 9,756
 1,613
 (6,597) 11,558
Third Quarter 2016          
Net sales $103,699
 $107,250
 $38,670
 $
 $249,619
Intersegment sales 47
 21,505
 
 
 21,552
Value-added sales 87,247
 45,960
 25,803
 (2,009) 157,001
Operating profit (loss) 4,357
 8,245
 3,432
 (5,883) 10,151
           
First Nine Months 2017          
Net sales $310,487
 $429,550
 $90,742
 $
 $830,779
Intersegment sales 
 113
 42,508
 
 
 42,621
Value-added sales 262,534
 169,720
 67,810
 (3,602) 496,462
Operating profit (loss) 12,523
 24,873
 6,145
 (18,829) 24,712
First Nine Months 2016          
Net sales $292,024
 $328,927
 $113,955
 $
 $734,906
Intersegment sales 
 226
 54,110
 
 
 54,336
Value-added sales 248,799
 135,019
 75,548
 (4,573) 454,793
Operating profit (loss) 6,103
 20,748
 9,803
 (13,194) 23,460


In the second quarter of 2019, the Company recategorized its end markets based on the ongoing refinement of its go-to-market strategy. The changes reflect new processes designed to enable the Company to better serve global customers and growth markets.

The following table disaggregates revenue for each segment by end market for the second quarter and first six months of 2019 and 2018, respectively:
 (Thousands)
Performance Alloys and Composites
Advanced Materials
Precision Coatings
Other
Total
Second Quarter 2019









End Market









Semiconductor
$1,303

$100,758

$93

$

$102,154
Industrial
28,585

7,704

3,842



40,131
Aerospace and Defense
26,046

1,125

4,750



31,921
Consumer Electronics
22,663

500

4,430



27,593
Automotive
16,564

1,669

365



18,598
Energy
11,303

16,027





27,330
Telecom and Data Center
18,244

713





18,957
Other
10,523

4,742

15,894



31,159
    Total
$135,231

$133,238

$29,374

$

$297,843











Second Quarter 2018









End Market









Semiconductor
$1,299

$118,525

$428

$

$120,252
Industrial
28,974

7,951

3,171



40,096
Aerospace and Defense
25,964

1,010

4,960



31,934
Consumer Electronics
16,150

174

5,021



21,345
Automotive
23,236

1,804

469



25,509
Energy
9,825

12,069





21,894
Telecom and Data Center
17,784

566





18,350
Other
6,533

8,225

14,947



29,705
    Total
$129,765

$150,324

$28,996

$

$309,085






9


 (Thousands) Performance Alloys and Composites Advanced Materials Precision Coatings Other Total
First Six Months 2019          
End Market          
Semiconductor $3,268
 $205,125
 $205
 $
 $208,598
Industrial 55,015
 15,635
 7,992
 
 78,642
Aerospace and Defense 53,120
 2,618
 9,622
 
 65,360
Consumer Electronics 36,218
 705
 7,916
 
 44,839
Automotive 37,277
 3,023
 587
 
 40,887
Energy 22,397
 38,190
 
 
 60,587
Telecom and Data Center 35,836
 914
 
 
 36,750
Other 19,213
 11,053
 33,355
 
 63,621
    Total $262,344
 $277,263
 $59,677
 $
 $599,284

          
First Six Months 2018          
End Market          
Semiconductor $2,387
 $226,842
 $971
 $
 $230,200
Industrial 58,577
 15,416
 5,899
 
 79,892
Aerospace and Defense 44,246
 2,020
 9,644
 
 55,910
Consumer Electronics 31,455
 626
 9,291
 
 41,372
Automotive 46,773
 4,184
 691
 
 51,648
Energy 17,612
 33,480
 
 
 51,092
Telecom and Data Center 32,647
 1,031
 
 
 33,678
Other 14,304
 20,270
 34,186
 
 68,760
    Total $248,001
 $303,869
 $60,682
 $
 $612,552


Intersegment sales are eliminated in consolidation.


Note C — Revenue Recognition

Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue, in an amount that reflects the consideration to which it expects to be entitled, upon satisfaction of a performance obligation, by transferring control over a product to the customer. Control over the product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.

Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at June 28, 2019. Remaining performance obligations include noncancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the practical expedient at June 28, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $19.6 million.

Contract Balances: The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities:

(Thousands) June 28, 2019 December 31, 2018 $ change % change
Accounts receivable, trade $132,493
 $124,498
 $7,995
 6 %
Unbilled receivables 9,430
 4,619
 4,811
 104 %
Unearned revenue 5,829
 5,918
 (89) (2)%


Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred relating to our receivables were immaterial during the second quarter and first six months of 2019.

Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables.

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately $5.0 million of the unearned amounts as revenue during the first six months of 2019.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less. The Company does not include extended payment terms in its contracts with customers.

Note D — Other-net
Other-net expense for the thirdsecond quarter and first ninesix months of 2017of 2019 and 20162018 is summarized as follows: 
  Second Quarter Ended Six Months Ended
  June 28, June 29, June 28, June 29,
(Thousands) 2019 2018 2019 2018
Metal consignment fees $2,225
 $2,588
 $5,316
 $5,017
Amortization of intangible assets 368
 561
 758
 1,334
Foreign currency loss 307
 1,230
 384
 1,219
Net loss (gain) on disposal of fixed assets 118
 (3) 142
 23
Rental income (29) (134) (58) (260)
Other items (98) 71
 470
 (96)
Total $2,891
 $4,313
 $7,012
 $7,237

  Third Quarter Ended Nine Months Ended
  Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(Thousands) 2017 2016 2017 2016
Metal consignment fees $2,436
 $1,665
 $6,183
 $4,851
Amortization of intangible assets 1,179
 1,148
 3,456
 3,444
Foreign currency exchange/translation loss (gain) (201) 336
 (794) 977
Fixed asset impairment 114
 
 314
 
Cost reduction initiatives 189
 
 189
 
Net loss (gain) on disposal of fixed assets 60
 94
 207
 (601)
Other items 24
 (53) 268
 326
Total $3,801
 $3,190
 $9,823
 $8,997


Note E — Income Taxes

The Company's effective tax rate for the second quarter of 2019 and 2018 was 18.8% and 20.9%, respectively, and 18.5% and 17.0% for the first six months of 2019 and 2018, respectively. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Additionally, the effective tax rate for the first six months of 2019 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based compensation. The effective tax rate for the first six months of 2018 included a net discrete income tax benefit of $1.0 million, primarily related to Staff Accounting Bulletin (SAB) No. 118 adjustments.





910



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




Note E — Restructuring
In 2017, the Company completed cost reduction actions in order to align costs with commensurate business levels. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. Costs associated with these actions within the Other and Precision Coatings segments included severance associated with approximately twenty-three employees and other related costs.
In 2016, the Company initiated a plan to close the Fukuya, Japan service center, which is a part of the Performance Alloys and Composites segment. Costs associated with the plan included severance associated with approximately twelve employees and related facility exit costs.
These costs are presented in the Consolidated Statements of Income as follows:
  Third Quarter Ended Nine Months Ended
(Thousands) Sept. 29, 2017 Sept. 30, 2016 Sept. 29, 2017 Sept. 30, 2016
Cost of sales $346
 $
 $463
 $
Selling, general, and administrative (SG&A) expense 127
 
 1,259
 
Other-net 189
 
 189
 
Total $662
 $
 $1,911
 $
Remaining severance payments related to these initiatives of $0.3 million are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company does not expect to incur additional costs related to these initiatives.


Note F — Income Taxes
The Company recorded income tax expense of $1.7 million in the third quarter of 2017, an effective tax rate of 15.5% against income before income taxes, and income tax expense of $1.6 million in the third quarter of 2016, an effective tax rate of 16.7% against income before income taxes.
In the first nine months of 2017, the Company recorded income tax expense of $3.3 million, an effective tax rate of 14.4%, and income tax expense of $3.1 million in the first nine months of 2016, an effective tax rate of 14.0%.
The Company recorded discrete benefits of $0.5 million and $1.3 million, respectively, in the third quarter and first nine months of 2017. Of these amounts, $0.4 million related to the reversal of uncertain tax positions due to a lapse in the statute of limitations in the third quarter of 2017. Also, $0.1 million in the third quarter and $0.5 million in the first nine months of 2017 related to the adoption of ASU 2016-09, Improvements to Employee Share-based Payment Accounting.
The Company recorded discrete items in the first nine months of 2016, resulting in a net tax benefit of $1.0 million, primarily due to international tax planning initiatives.
Income tax expense in the third quarter and first nine months of both 2017 and 2016 was lower than the U.S Federal statutory income tax rate of 35% primarily due to the impact of percentage depletion, foreign rate differential, research and development credit, discrete benefits, and other items.



10


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


Note G — Earnings Per Share (EPS)
The following table sets forth the computation of basic and diluted EPS:
  Second Quarter Ended Six Months Ended
  June 28, June 29, June 28, June 29,
(Thousands, except per share amounts) 2019 2018 2019 2018
Numerator for basic and diluted EPS:        
Net income $15,540
 $11,144
 $32,446
 $21,708
Denominator:        
Denominator for basic EPS:        
Weighted-average shares outstanding 20,383
 20,221
 20,326
 20,178
Effect of dilutive securities:        
Stock appreciation rights 76
 166
 92
 185
Restricted stock units 76
 75
 77
 85
Performance-based restricted stock units 131
 131
 140
 135
Diluted potential common shares 283
 372
 309
 405
Denominator for diluted EPS: 
 
    
Adjusted weighted-average shares outstanding 20,666
 20,593
 20,635
 20,583
Basic EPS $0.76
 $0.55
 $1.60
 $1.08
Diluted EPS $0.75
 $0.54
 $1.57
 $1.05

  Third Quarter Ended Nine Months Ended
  Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(Thousands, except per share amounts) 2017 2016 2017 2016
Numerator for basic and diluted EPS:        
Net income $9,320
 $8,045
 $19,683
 $18,962
Denominator:        
Denominator for basic EPS:        
Weighted-average shares outstanding 20,040
 19,957
 20,007
 19,996
Effect of dilutive securities:        
Stock appreciation rights 149
 70
 148
 66
Restricted stock units 94
 82
 95
 86
Performance-based restricted stock units 128
 83
 111
 61
Diluted potential common shares 371
 235
 354
 213
Denominator for diluted EPS: 
 
    
Adjusted weighted-average shares outstanding 20,411
 20,192
 20,361
 20,209
Basic EPS $0.47
 $0.40
 $0.98
 $0.95
Diluted EPS $0.46
 $0.40
 $0.97
 $0.94


Stock appreciation rights (SARs)Securities totaling 219,29284,509 and 982,58865,112 for the quarters ended SeptemberJune 28, 2019 and June 29, 2017 and September 30, 2016,2018, respectively, and 370,917144,154 and 993,41865,112 for the ninesix months ended SeptemberJune 28, 2019 and June 29, 2017 and September 30, 2016,2018, respectively, were excluded from the dilution calculation as their effect would have been anti-dilutive.


Note HG — Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:
  June 28, December 31,
(Thousands) 2019 2018
Raw materials and supplies $38,425
 $33,182
Work in process 190,428
 195,879
Finished goods 32,062
 30,643
Subtotal $260,915
 $259,704
Less: LIFO reserve balance 47,586
 44,833
Inventories $213,329
 $214,871
  Sept. 29, Dec. 31,
(Thousands) 2017 2016
Raw materials and supplies $44,924
 $36,233
Work in process 181,553
 169,327
Finished goods 37,671
 38,147
Subtotal $264,148
 $243,707
Less: LIFO reserve balance 43,925
 42,842
Inventories $220,223
 $200,865

The liquidation of last in, first out (LIFO) inventory layers did not impactincreased cost of sales by $0.1 million in the thirdsecond quarter of 2017 or 2016. In theand first ninesix months of 2017, costboth 2019 and 2018.
The Company maintains the majority of sales were increased by $0.2 million. In the first nine monthsprecious metals and copper used in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of 2016, costoff-balance sheet precious metals and copper was $295.7 million as of sales were reduced by $3.2 million.June 28, 2019 versus $316.1 million as of December 31, 2018.



11



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


Note H — Leases
The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years. Several operating lease agreements contain options to extend the lease term and/or options for early termination. The lease term consists of the non-cancelable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. The weighted average remaining lease term for the Company's operating and finance leases as of June 28, 2019 was 5.09 years and 19.87 years, respectively.

The discount rate implicit within the leases is generally not determinable, and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for leases is determined based on the lease term in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure the Company's operating and finance lease liabilities as of June 28, 2019 was 5.55% and 5.31%, respectively.

The components of operating and finance lease cost for the second quarter and first six months of 2019 were as follows:
  Second Quarter Ended Six Months Ended
  June 28, June 28,
(Thousands) 2019 2019
Components of lease expense    
Operating lease cost $2,291
 $5,003
     
Finance lease cost    
Amortization of right-of-use assets 354
 710
Interest on lease liabilities 259
 522
Total lease cost $2,904
 $6,235


Operating lease expense amounted to $2.3 million and $3.0 million during the second quarter of 2019 and 2018, respectively, and $5.0 million and $6.1 million during the first six months of 2019 and 2018, respectively. The Company straight-lines its expense of fixed payments for operating leases over the lease term and expenses the variable lease payments in the period incurred. These variable lease payments are not included in the calculation of right-of-use assets or lease liabilities.



12


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


Supplemental balance sheet information related to the Company's operating and finance leases as of June 28, 2019 was as follows:
  June 28,
(Thousands) 2019
Supplemental balance sheet information  
   
Operating Leases  
Operating lease right-of-use assets $26,788
Other liabilities and accrued items 6,927
Operating lease liabilities 21,118
   
Finance Leases  
Property, plant, and equipment $26,330
Allowances for depreciation, depletion, and amortization (3,140)
Finance lease assets, net $23,190
Other liabilities and accrued items $1,238
Finance lease liabilities 18,325
Total principal payable on finance leases $19,563


Future maturities of the Company's lease liabilities as of June 28, 2019 are as follows:
  Finance Operating
(Thousands) Leases Leases
2019 $1,122
 $4,201
2020 2,244
 7,618
2021 2,244
 6,619
2022 2,244
 4,727
2023 1,534
 3,818
2024 and thereafter 22,414
 5,148
Total lease payments 31,802
 32,131
Less amount of lease payment representing interest 12,239
 4,086
Total present value of lease payments

 $19,563
 $28,045


Supplemental cash flow information related to leases for the first six months of 2019 was as follows:
  Six Months Ended
  June 28,
(Thousands) 2019
Supplemental cash flow information  
Cash paid for amounts included in the measurement of lease liabilities:  
Operating cash flows from operating leases $7,710
Operating cash flows from finance leases 522
Financing cash flows from finance leases 599




13


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


Note I — Pensions and Other Post-employment Benefits
The following is a summary of the net periodic benefit cost for the thirdsecond quarter of 2019 and first nine months of 2017 and 20162018 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
 
Second Quarter Ended
Second Quarter Ended


June 28,
June 29,
June 28,
June 29,
(Thousands)
2019
2018
2019
2018
Components of net periodic benefit cost (benefit)







Service cost
$1,418

$1,674

$18

$28
Interest cost
1,347

2,397

99

99
Expected return on plan assets
(2,167)
(3,697)



Amortization of prior service benefit
122

(30)
(375)
(374)
Amortization of net loss (gain)
627

1,959

(23)

Pension curtailment charge 3,296
 
 
 
Net periodic benefit cost (benefit)
$4,643

$2,303

$(281)
$(247)


11


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




Pension Benefits
Other Benefits Pension Benefits Other Benefits

Third Quarter Ended
Third Quarter Ended Six Months Ended Six Months Ended


Sept. 29,
Sept. 30,
Sept. 29,
Sept. 30, June 28, June 29, June 28, June 29,
(Thousands)
2017
2016
2017
2016 2019 2018 2019 2018
Components of net periodic benefit cost (benefit)







        
Service cost
$2,106

$1,946

$23

$26
 $2,758
 $3,348
 $35
 $56
Interest cost
2,372

2,595

99

140
 2,904
 4,794
 199
 198
Expected return on plan assets
(3,678)
(3,488)



 (4,290) (7,394) 
 
Amortization of prior service benefit
(42)
(115)
(374)
(374) 242
 (61) (749) (749)
Amortization of net loss
1,623

1,431




Amortization of net loss (gain) 1,431
 3,919
 (46) 
Pension curtailment charge 3,296
 
 
 
Net periodic benefit cost (benefit)
$2,381

$2,369

$(252)
$(208) $6,341
 $4,606
 $(561) $(495)
        
 Pension Benefits Other Benefits
 Nine Months Ended Nine Months Ended
 Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(Thousands) 2017 2016 2017 2016
Components of net periodic benefit cost (benefit)        
Service cost $6,188
 $5,838
 $69
 $77
Interest cost 7,098
 7,785
 297
 422
Expected return on plan assets (11,007) (10,464) 
 
Amortization of prior service benefit (236) (345) (1,122) (1,122)
Amortization of net loss 4,821
 4,292
 
 
Net periodic benefit cost (benefit) $6,864
 $7,106
 $(756) $(623)
The Company made contributions to the domestic defined benefit pension plan of $8.0$3.0 million and $12.0$13.0 million in the first ninesix months of 20172019 and 2016,2018, respectively.
Beginning in 2017, theThe Company has elected to use a spot-rate approach to estimatereports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and interestthe non-service cost components of net periodic benefit cost for itsin Other non-operating expenses.
In May 2019, the Company's Board of Directors approved changes to the U.S. defined benefit pension plans.plan. The spot-rate approach applies separate discount ratesCompany will freeze the pay and service amounts used to calculate pension benefits for each projected benefit paymentactive participants in the calculation. Historically, thepension plan as of January 1, 2020. The Company usedrecognized a weighted-average approach to determine the service and interest cost components. The change is being accounted for as a change in estimate and, accordingly, is being applied prospectively. The reduction in service and interest costs for 2017non-cash pre-tax pension curtailment charge of $3.3 million associated with this change approximated $0.3 million and $0.8 millionthe plan amendment during the thirdsecond quarter and first nine months of 2017, respectively, and is expected to total approximately $1.0 million.2019.



14



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



Note J — Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the thirdsecond quarter of 2019 and 2018 and first ninesix months of 20172019 and 20162018 are as follows:
  Gains and Losses on Cash Flow Hedges      
(Thousands) Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total
Balance at March 29, 2019
$1,663

$(24)
$189
 $1,828

$(54,003)
$(5,095)
$(57,270)
Other comprehensive income before reclassifications
(269)
(563)
(580) (1,412)
14,224

339

13,151
Amounts reclassified from accumulated other comprehensive income
(46)
(1)
163
 116

3,781



3,897
Net current period other comprehensive income (loss) before tax
(315)
(564)
(417) (1,296)
18,005

339

17,048
Deferred taxes
(72)
(130)
(94) (296)
4,052



3,756
Net current period other comprehensive income (loss) after tax
(243)
(434)
(323) (1,000)
13,953

339

13,292
Balance at June 28, 2019
$1,420

$(458)
$(134) $828

$(40,050)
$(4,756)
$(43,978)
               
Balance at March 30, 2018 $326
 $(238) $
 $88
 $(98,314) $(2,995) $(101,221)
Other comprehensive income (loss) before reclassifications 871
 635
 
 1,506
 
 (944) 562
Amounts reclassified from accumulated other comprehensive income 42
 23
 
 65
 1,622
 
 1,687
Net current period other comprehensive income (loss) before tax 913
 658
 
 1,571
 1,622
 (944) 2,249
Deferred taxes (343) 151
 
 (192) 326
 
 134
Net current period other comprehensive income (loss) after tax 1,256
 507
 
 1,763
 1,296
 (944) 2,115
Balance at June 29, 2018 $1,582
 $269
 $
 $1,851
 $(97,018) $(3,939) $(99,106)

  Gains and Losses on Cash Flow Hedges      
(Thousands) Foreign Currency Precious Metals Total Pension and Post-Employment Benefits Foreign Currency Translation Total
Balance at June 30, 2017
$1,109

$93

$1,202

$(80,842)
$(4,282)
$(83,922)
Other comprehensive income (loss) before reclassifications
(324)
(205)
(529)


271

(258)
Amounts reclassified from accumulated other comprehensive income
433

(94)
339

1,345



1,684










1215



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




 Gains and Losses on Cash Flow Hedges       Gains and Losses on Cash Flow Hedges      
(Thousands) Foreign Currency Precious Metals Total Pension and Post-Employment Benefits Foreign Currency Translation Total Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total
Balance at December 31, 2018 $1,263
 $79
 $(441) $901
 $(54,543) $(4,592) $(58,234)
Other comprehensive income before reclassifications 248
 (636) 304
 (84) 14,224
 (164) 13,976
Amounts reclassified from accumulated other comprehensive income (44) (62) 92
 (14) 4,441
 
 4,427
Net current period other comprehensive income (loss) before tax
109

(299)
(190)
1,345

271

1,426
 204
 (698) 396
 (98) 18,665
 (164) 18,403
Deferred taxes on current period activity
41

(111)
(70)
464



394
Deferred taxes 47
 (161) 89
 (25) 4,172
 
 4,147
Net current period other comprehensive income (loss) after tax
68

(188)
(120)
881

271

1,032
 157
 (537) 307
 (73) 14,493
 (164) 14,256
Balance at September 29, 2017
$1,177

$(95)
$1,082

$(79,961)
$(4,011)
$(82,890)
Balance at June 28, 2019 $1,420
 $(458) $(134) $828
 $(40,050) $(4,756) $(43,978)
                          
Balance at July 1, 2016 $958
 $
 $958
 $(74,546) $(3,037) $(76,625)
Balance at December 31, 2017 $959
 $(196) $
 $763
 $(99,592) $(4,108) $(102,937)
Other comprehensive income (loss) before reclassifications (126) 
 (126) 
 467
 341
 (327) 444
 
 117
 
 169
 286
Amounts reclassified from accumulated other comprehensive income 336
 
 336
 1,015
 
 1,351
 419
 159
 
 578
 3,248
 
 3,826
Net current period other comprehensive income (loss) before tax 210
 
 210
 1,015
 467
 1,692
 92
 603
 
 695
 3,248
 169
 4,112
Deferred taxes on current period activity 78
 
 78
 342
 
 420
Deferred taxes (531) 138
 
 (393) 674
 
 281
Net current period other comprehensive income (loss) after tax 132
 
 132
 673
 467
 1,272
 623
 465
 
 1,088
 2,574
 169
 3,831
Balance at September 30, 2016 $1,090
 $
 $1,090
 $(73,873) $(2,570) $(75,353)
            
Balance at December 31, 2016
$1,837

$

$1,837

$(82,358)
$(5,660)
$(86,181)
Other comprehensive income (loss) before reclassifications
(1,205)
30

(1,175)


1,649

474
Amounts reclassified from accumulated other comprehensive income
219

(182)
37

3,655



3,692
Net current period other comprehensive income (loss) before tax
(986)
(152)
(1,138)
3,655

1,649

4,166
Deferred taxes on current period activity
(326)
(57)
(383)
1,258



875
Net current period other comprehensive income (loss) after tax
(660)
(95)
(755)
2,397

1,649

3,291
Balance at September 29, 2017
$1,177

$(95)
$1,082

$(79,961)
$(4,011)
$(82,890)
            
Balance at December 31, 2015 $1,579
 $
 $1,579
 $(76,796) $(5,488) $(80,705)
Other comprehensive income (loss) before reclassifications (1,571) 
 (1,571) 
 2,918
 1,347
Amounts reclassified from accumulated other comprehensive income 793
 
 793
 3,045
 
 3,838
Net current period other comprehensive income (loss) before tax (778) 
 (778) 3,045
 2,918
 5,185
Deferred taxes on current period activity (289) 
 (289) 122
 
 (167)
Net current period other comprehensive income (loss) after tax (489) 
 (489) 2,923
 2,918
 5,352
Balance at September 30, 2016 $1,090
 $
 $1,090
 $(73,873) $(2,570) $(75,353)
Balance at June 29, 2018 $1,582
 $269
 $
 $1,851
 $(97,018) $(3,939) $(99,106)



13


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



Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Other-netNet sales in the Consolidated Statements of Income. Reclassifications from accumulated other comprehensive income of gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. 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 I for additional details on pension and post-employment expenses.







1416



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




Note K — Stock-based Compensation Expense
Stock-based compensation expense, which includes awards settled in shares and in cash, was $1.5$3.5 million and $6.2 million in the thirdsecond quarter and first ninesix months of 2017,2019, respectively, compared to $2.1$2.7 million and $4.4$5.2 million in the same periods of 2016.2018.
The Company granted 97,015 SARs73,461 stock appreciation rights (SARs) to certain employees during the first ninesix months of 2017.2019. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ninesix months ended September 29, 2017June 28, 2019 were $35.26$58.30 and $10.89,$17.76, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:
Risk-free interest rate 1.922.47%
Dividend yield 1.10.7%
Volatility 34.031.7%
Expected term (in years) 5.65.2


The Company granted 62,18563,665 stock-settled restricted stock units (RSUs) and 32,466 cash-settled RSUs to certain employees and 11,048 stock-settled RSUs to non-employee directors during the first ninesix months of 2017.2019. The Company measures the fair value of stock-settled RSUs based on the closing market price of a share of Materion common stock on the date of the grant. The weighted-average fair value per share was $34.95$58.30 and $68.79 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the ninesix months ended September 29, 2017. Cash-settledJune 28, 2019. RSUs are accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stockexpensed over the vesting period of three years.years for employees and one year for non-employee directors.
The Company granted stock-settled and cash-settled performance-based restricted stock units (PRSUs) to certain employees in the first ninesix months of 2017.2019. The weighted-average fair value of the stock-settled PRSUs was $30.28$69.84 per share and will be expensed over the vesting period of three years. The liability for cash-settled PRSUs is re-measured at fair value each reporting period, and the adjustment to income 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.
At September 29, 2017, unearnedJune 28, 2019, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately $5.3$13.6 million, and is expected to be recognized over the remaining vesting period of the respective grants.


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.






1517



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




The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of September 29, 2017June 28, 2019 and December 31, 2016:2018:
         
(Thousands) Total Carrying Value in the Consolidated Balance Sheets 
Quoted Prices
in  Active
Markets  for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 2019 2018 2019 2018 2019 2018 2019 2018
Financial Assets                
Deferred compensation investments $3,121
 $2,156
 $3,121
 $2,156
 $
 $
 $
 $
Foreign currency forward contracts 119
 246
 
 
 119
 246
 
 
Precious metal swaps 
 237
 
 
 
 237
 
 
Copper swaps 9
 
 
 
 9
 
 
 
Total $3,249
 $2,639
 $3,121
 $2,156
 $128
 $483

$

$
Financial Liabilities                
Deferred compensation liability $3,121
 $2,156
 $3,121
 $2,156
 $
 $
 $
 $
Foreign currency forward contracts 121
 432
 
 
 121
 432
 
 
Precious metal swaps 596
 135
 
 
 596
 135
 
 
Copper swaps 182
 569
 
 
 182
 569
 
 
Total $4,020
 $3,292
 $3,121
 $2,156
 $899
 $1,136
 $
 $
         
(Thousands) Total Carrying Value in the Consolidated Balance Sheets 
Quoted Prices
in  Active
Markets  for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 2017 2016 2017 2016 2017 2016 2017 2016
Financial Assets                
Deferred compensation investments $2,149
 $1,734
 $2,149
 $1,734
 $
 $
 $
 $
Foreign currency forward contracts 149
 691
 
 
 149
 691
 
 
Precious metal swaps 45
 
 
 
 45
 
 
 
Total $2,343
 $2,425
 $2,149
 $1,734
 $194
 $691

$

$
Financial Liabilities                
Deferred compensation liability $2,149
 $1,734
 $2,149
 $1,734
 $
 $
 $
 $
Foreign currency forward contracts 669
 1
 
 
 669
 1
 
 
Precious metal swaps 197
 
 
 
 197
 
 
 
Total $3,015
 $1,735
 $2,149
 $1,734
 $866
 $1
 $
 $

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 Sheets approximate fair values as of September 29, 2017June 28, 2019 and December 31, 2016.2018.


Note M — Derivative Instruments and Hedging Activity
The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal and copper 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 risk 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,



18


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


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



16


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


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 that 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.
In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment. The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure.
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.
Copper. We also use copper in our production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time our price exposure to copper is generally in balance, there can be a lag between the change in our cost and the pass-through to our customers, resulting in higher or lower margins in a given period. To mitigate this impact, we hedge a portion of this pricing risk.
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 fair value. 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.












1719



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




The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of September 29, 2017June 28, 2019 and December 31, 2016:2018:
  June 28, 2019 December 31, 2018
(Thousands) 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Foreign currency forward contracts - euro        
Prepaid expenses $2,421
 $27
 $8,767
 $244
Other liabilities and accrued items 3,836
 52
 8,771
 249
  September 29, 2017 December 31, 2016
(Thousands) 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Other liabilities and accrued items        
Foreign currency forward contracts - euro $14,402
 $(11) $
 $
Total $14,402
 $(11) $
 $

These outstanding foreign currency derivatives were related to intercompany loans. Other-net included no foreign currency lossesimpact relating to these derivatives during both the second quarter and the first six months of $0.52019 and included $1.6 million and $1.1 million of foreign currency gains during the thirdsecond quarter and first ninesix months of 2017,2018, respectively.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of September 29, 2017June 28, 2019 and December 31, 2016:2018:
  June 28, 2019 December 31, 2018
(Thousands) 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Prepaid expenses        
Foreign currency forward contracts - yen $1,465
 $9
 $
 $
Foreign currency forward contracts - euro 7,475
 83
 725
 2
Precious metal swaps 
 
 4,533
 237
Copper swaps 977
 9
 
 
Total 9,917
 101
 5,258
 239
         
Other liabilities and accrued items        
Foreign currency forward contracts - yen 2,065
 35
 1,264
 17
Foreign currency forward contracts - euro 7,459
 34
 19,158
 166
Precious metal swaps 6,828
 573
 2,864
 135
Copper swaps 4,359
 182
 11,170
 569
Total 20,711
 824
 34,456
 887
         
Other long-term liabilities        
Precious metal swaps 697
 23
 
 
Total $31,325
 $746
 $39,714
 $648
  September 29, 2017 December 31, 2016
(Thousands) 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Prepaid expenses        
Foreign currency forward contracts - yen $2,000
 $59
 $2,418
 $239
Foreign currency forward contracts - euro 6,829
 90
 6,493
 452
Precious metal swaps 2,148
 13
 
 
Total 10,977
 162
 8,911
 691
         
Other assets        
Precious metal swaps 1,932
 32
 
 
Total 1,932
 32
 
 
         
Other liabilities and accrued items        
Foreign currency forward contracts - euro 12,689
 (658) 537
 (1)
Precious metal swaps 7,845
 (170) 
 
Total 20,534
 (828) 537
 (1)
         
Other long-term liabilities        
Precious metal swaps 1,999
 (27) 
 
Total $35,442
 $(661) $9,448
 $690

All of these contracts were designated and effective as cash flow hedges. No ineffectiveness expense was recorded in the third quarter or first nine months of 2017 or 2016.
Changes in the fair value of outstanding cash flow hedges recorded in OCI for the first nine months of 2017 and 2016 totaled decreases of $1.2 million and $1.6 million, respectively. The Company expects to relieve substantially the entire balance in OCI as of September 29, 2017June 28, 2019 to the Consolidated Statements of Income within the next 18-month15-month period. Refer to Note J for additional OCI details.



20


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


The following table summarizes the amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification as of the second quarter and first six months of of 2019: 
    Second Quarter Ended Six Months ended
(Thousands)   June 28, 2019 June 28, 2019
Hedging relationship Line item    
Foreign currency forward contracts Net sales (46) (44)
Precious metal swaps Cost of sales (1) (62)
Copper swaps Cost of sales 163
 92
Total   $116
 $(14)


Note N — Contingencies
Legal Proceedings. For information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note QS ("Contingencies and Commitments") in the Company's 20162018 Annual Report on Form 10-K.
Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be



18


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


reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
Environmental Proceedings. 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 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 $6.1$6.2 million and $6.5 million at September 29, 2017June 28, 2019 and $6.0 million at December 31, 2016.2018, respectively. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.



Item 2.Management’s 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 end markets, including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and appliance.telecom and data center.





21



RESULTS OF OPERATIONS
Third
Second Quarter
 Third Quarter Ended Second Quarter Ended
 Sept. 29, Sept. 30, $ % June 28, June 29, $ %
(Thousands, except per share data) 2017 2016 Change Change 2019 2018 Change Change
Net sales $294,268
 $249,619
 $44,649
 18% $297,843
 $309,085
 $(11,242) (4)%
Value-added sales 171,382
 157,001
 14,381
 9% 194,896
 189,902
 4,994
 3 %
Gross margin 55,203
 50,755
 4,448
 9% 69,594
 61,838
 7,756
 13 %
Gross margin as a % of value-added sales 32% 32% N/A
 N/A
 36% 33% N/A
 N/A
Selling, general, and administrative (SG&A) expense
 36,415
 34,177
 2,238
 7% 39,891
 38,473
 1,418
 4 %
SG&A expense as a % of value-added sales 21% 22% N/A
 N/A
 20% 20% N/A
 N/A
Research and development (R&D) expense 3,429
 3,237
 192
 6% 4,062
 3,860
 202
 5 %
R&D expense as a % of value-added sales 2% 2% N/A
 N/A
 2% 2% N/A
 N/A
Other—net 3,801
 3,190
 611
 19% 2,891
 4,313
 (1,422) (33)%
Operating profit 11,558

10,151
 1,407
 14% 22,750

15,192
 7,558
 50 %
Interest expense—net 533
 490
 43
 9% 500
 667
 (167) (25)%
Other non-operating expense—net 3,112
 437
 2,675
 612 %
Income before income taxes 11,025
 9,661
 1,364
 14% 19,138
 14,088
 5,050
 36 %
Income tax expense 1,705
 1,616
 89
 6% 3,598
 2,944
 654
 22 %
Net income $9,320
 $8,045
 $1,275
 16% $15,540
 $11,144
 $4,396
 39 %
                
Diluted earnings per share $0.46
 $0.40
 $0.06
 15% $0.75
 $0.54
 $0.21
 39 %
N/A = Not Applicable





19



Net sales of $294.3$297.8 million in the thirdsecond quarter of 2017 were $44.72019 decreased $11.2 million higher than the $249.6from $309.1 million recorded in the thirdsecond quarter of 2016.2018. Net sales growth in our Performance Alloys and Composites and Precision Coatings segments was more than offset by decreased net sales in our Advanced Materials segment driven by a lower mix of $38.6 million duringprecious metal-containing products and the third quartermix of 2017 were attributable to the high performance target materials business of the Heraeus Group (HTB). Changescustomer-supplied material. The change in precious metal and copper prices negativelyunfavorably impacted net sales induring the thirdsecond quarter of 20172019 by approximately $2.4 million when compared to the third quarter of 2016.$0.8 million.


Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices.prices and changes in mix due to customer-supplied material. Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein. Value-added sales of $171.4$194.9 million in the thirdsecond quarter of 20172019 increased $14.4$5.0 million, or 9%3%, compared to the thirdsecond quarter of 2016. Value-added2018. The increase in value-added sales from the HTB acquisition totaled $11.4 millionwas primarily driven by commercial excellence initiatives and stronger demand in the third quarter of 2017. Value-added sales to theenergy, industrial, and consumer electronics end market, which accounted for 31% of our total value-added sales duringmarkets.

Gross margin in the thirdsecond quarter of 2017, increased $2.9 million from the prior-year period. Also, value-added sales in the industrial components end market increased $4.2 million from the prior-year period. These increases were offset by weakness in the medical end market, which lowered value-added sales by approximately $6.1 million.

Gross margin in the third quarter of 20172019 was $55.2$69.6 million, or $4.4$7.8 million higher than the $50.8$61.8 million gross margin recorded during the thirdsecond quarter of 2016.2018. Gross margin expressed as a percentage of value-added sales was 32%increased to 36% in the thirdsecond quarter of 2019 from 33% in the second quarter of 2018 primarily due to a combination of higher sales volume and improved sales mix from both 2017an end market and 2016.product perspective and improved manufacturing performance.


SG&A expense was $36.4$39.9 million in the thirdsecond quarter of 2017, or $2.2 million higher than the $34.22019, compared to $38.5 million recorded in the thirdsecond quarter of 2016.2018. The increase is attributablein SG&A expense for the second quarter of 2019 was primarily driven by investments to $2.1 millionexecute strategic initiatives. Expressed as a percentage of HTB expenses.value-added sales, SG&A expense was 20% in the second quarter of both 2019 and 2018.


R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D expense was flat as a percentage of value-added sales at approximately 2% in the thirdsecond quarter of both 20172019 and 2016.2018.


Other-net was $3.8$2.9 million of expense in the thirdsecond quarter of 2017,2019, or a $0.6$1.4 million increasedecrease from the thirdsecond quarter of 2016.2018. The decrease in Other-net was primarily due to less foreign exchange losses recognized in the thirdsecond quarter of 2017 included higher metal consignment fees of $0.8 million, as2019 compared to the thirdsecond quarter of 2016.2018. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.




22




Interest expense-net was $0.5 million and $0.7 million in the thirdsecond quarter of both 20172019 and 2016.2018, respectively.


Other non-operating expense-net includes components of pension and post-retirement expense other than service costs and a non-cash pre-tax pension curtailment charge of $3.3 million associated with the pension plan amendment to freeze the pay and service amounts used to calculate pension benefits during the second quarter of 2019. Refer to Note I to the Consolidated Financial Statements for details of the components of net periodic benefit costs.

Income tax expensefor the thirdsecond quarter of 20172019 was $1.7$3.6 million compared to $1.6$2.9 million in the thirdsecond quarter of 2016.2018. The effective tax rate for the thirdsecond quarter of 20172019 was 15.5%18.8% compared to 16.7%an effective tax rate of 20.9% in the prior-year period. The effectseffective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion the foreign rate differential,and the research and development credit, discrete benefits, and other items were the primary factors for the difference between the effective and statutory rates in the third quarter of 2017 and 2016. Refer to Note F to the Consolidated Financial Statements for further details on income taxes.credit.





20



NineSix Months
 Nine Months Ended Six Months Ended
 Sept. 29, Sept. 30, $ % June 28, June 29, $ %
(Thousands, except per share data) 2017 2016 Change Change 2019 2018 Change Change
Net sales $830,779
 $734,906
 $95,873
 13% $599,284
 $612,552
 $(13,268) (2)%
Value-added sales 496,462
 454,793
 41,669
 9% 382,577
 371,215
 11,362
 3 %
Gross margin 152,756
 139,418
 13,338
 10% 138,906
 120,118
 18,788
 16 %
Gross margin as a % of value-added sales 31% 31% N/A
 N/A
 36% 32% N/A
 N/A
SG&A expense
 108,118
 97,101
 11,017
 11% 79,955
 76,935
 3,020
 4 %
SG&A expense as a % of value-added sales 22% 21% N/A
 N/A
 21% 21% N/A
 N/A
R&D expense 10,103
 9,860
 243
 2% 7,802
 7,503
 299
 4 %
R&D expense as a % of value-added sales 2% 2% N/A
 N/A
 2% 2% N/A
 N/A
Other—net 9,823
 8,997
 826
 9% 7,012
 7,237
 (225) (3)%
Operating profit 24,712
 23,460
 1,252
 5% 44,137
 28,443
 15,694
 55 %
Interest expense—net 1,721
 1,417
 304
 21% 966
 1,397
 (431) (31)%
Other non-operating expense—net 3,357
 879
 2,478
 282 %
Income before income taxes 22,991
 22,043
 948
 4% 39,814
 26,167
 13,647
 52 %
Income tax expense 3,308
 3,081
 227
 7% 7,368
 4,459
 2,909
 65 %
Net income $19,683
 $18,962
 $721
 4% $32,446
 $21,708
 $10,738
 49 %
                
Diluted earnings per share $0.97
 $0.94
 $0.03
 3% $1.57
 $1.05
 $0.52
 50 %
N/A = Not Applicable


Net sales of $830.8$599.3 million in the first ninesix months of 2017 were $95.92019 decreased $13.3 million higher than the $734.9from $612.6 million recorded in the first ninesix months of 2016. Changes2018. Net sales growth in our Performance Alloys and Composites segment was more than offset by decreased net sales in our Advanced Materials and Precision Coatings segments primarily driven by lower mix of precious metal-containing products and the mix of customer-supplied material. The change in precious metal and copper prices favorablyunfavorably impacted net sales during the first half of 2019 by $5.0 million.

Value-added sales of $382.6 million in the first nine monthshalf of 2017 by approximately $6.02019 increased $11.4 million, whenor 3%, compared to the first nine monthshalf of 2016. Net2018. The increase in value-added sales was primarily driven by commercial excellence initiatives and stronger demand in the Performance Alloysaerospace and Composites segment increased $18.5 million due to higher sales volume, including shipments of raw material beryllium hydroxide. Net sales of $77.9 million during the first nine months of 2017 were attributable to the HTB acquisition. Excluding the HTB acquisition, net sales in the Advanced Materials segment increased $22.7 million due to higher sales volume in the consumer electronicsdefense, energy, telecom and data center, and industrial components end markets. These favorable impacts were offset by lower sales volume in the medical end market in the Precision Coatings segment.


Value-added sales of $496.5 million Gross margin in the first nine monthshalf of 2017 increased $41.72019 was $138.9 million, or 9% compared to the first nine months of 2016. Value-added sales from the HTB acquisition totaled approximately $24.9 million in the first nine months of 2017. Value-added sales to the consumer electronics end market, which accounted for 30% of our total value-added sales during the first nine months of 2017, increased $9.7 million from the prior-year period. Also, value-added sales in the industrial components end market increased $10.4 million from the prior-year period.

Gross margin in the first nine months of 2017 was $152.8 million, or $13.4$18.8 million higher than the $139.4$120.1 million gross margin recorded during the first nine monthshalf of 2016.2018. Gross margin was 31%expressed as a percentage of value-added sales increased to 36% in the first ninesix months of 2019 from 32% in the first six months of 2018 primarily due to a combination of improved sales mix from both 2017an end market and 2016.product perspective and improved manufacturing performance.


SG&A expense was $108.1$80.0 million in the first ninesix months of 2017, or $11.0 million higher than the $97.12019, compared to $76.9 million recorded in the first ninesix months of 2016.2018. The increase relatedin SG&A expense for the first half of 2019 was primarily driven by investments to higher incentive compensationexecute strategic initiatives for commercial excellence and stock-based compensation expense of $8.1 million, which included $1.4 million due to accelerated stock compensation expensevariable costs associated with driving top-line and profit growth. Expressed as a percentage of value-added sales, SG&A expense was 21% in the transitionfirst half of the Company's CEO. Additionally, the increase is attributable to HTB expenses of $4.2 million.both 2019 and 2018.




23




R&D expense was flat as a percentage of value-added sales at approximately 2% in the first nine monthshalf of both 20172019 and 2016.2018.


Other-net was $9.8 million and $9.0$7.0 million of expense in the first ninesix months of 2017 and 2016, respectively. Other-net in2019, or a $0.2 million decrease from the first ninesix months of 2017 included higher metal consignment fees of $1.3 million, as compared to the first nine months of 2016.2018. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.


Interest expense-net was $1.7$1.0 million in the first nine months of 2017, or a $0.3 million increase fromand $1.4 million in the first ninesix months of 2016 due2019 and 2018, respectively.

Other non-operating expense-net includes components of pension and post-retirement expense other than service costs and a non-cash pre-tax pension curtailment charge of $3.3 million associated with the pension plan amendment to higher average debt outstanding.freeze the pay and service amounts used to calculate pension benefits. Refer to Note I to the Consolidated Financial Statements for details of the components of net periodic benefit costs.





21



Income tax expensefor the first ninesix months of 20172019 was $3.3$7.4 million, compared to $3.1$4.5 million in the first ninesix months of 2016.2018. The effective tax rate for the first nine monthshalf of 20172019 was 14.4%18.5% compared to an effective tax rate of 14.0%17.0% in the prior-year period. The effectseffective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion the foreign rate differential,and the research and development credit, discrete benefits, and other items were the primary factors for the difference betweencredit. Additionally, the effective and statutory rates in the first nine monthstax rate for 2019 included a net discrete income tax benefit of 2017 and 2016. Refer$0.5 million, primarily related to Note Fexcess tax benefits from stock-based compensation. The effective tax rate for 2018 included a net discrete income tax benefit of $1.0 million, primarily related to the Consolidated Financial Statements for further details on income taxes.Staff Accounting Bulletin No. 118 adjustments.



22




Value-Added Sales - Reconciliation of Non-GAAP Financial Measure
A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the second quarter and first ninesix months of 20172019 and 20162018 is as follows:
 Third Quarter Ended Nine Months Ended Second Quarter Ended Six Months Ended
 Sept. 29,
Sept. 30, Sept. 29, Sept. 30, June 28,
June 29, June 28, June 29,
(Thousands) 2017
2016 2017 2016 2019
2018 2019 2018
Net sales                
Performance Alloys and Composites $109,393
 $103,699
 $310,487
 $292,024
 $135,231
 $129,765
 $262,344
 $248,001
Advanced Materials 157,770
 107,250
 429,550
 328,927
 133,238
 150,324
 277,263
 303,869
Precision Coatings 27,105
 38,670
 90,742
 113,955
 29,374
 28,996
 59,677
 60,682
Other 
 
 
 
 
 
 
 
Total $294,268
 $249,619
 $830,779
 $734,906
 $297,843
 $309,085
 $599,284
 $612,552
                
Less: pass-through metal costs                
Performance Alloys and Composites $18,756
 $16,452
 $47,953
 $43,225
 $19,988
 $19,615
 $37,500
 $37,552
Advanced Materials 97,379
 61,290
 259,830
 193,908
 74,931
 93,057
 161,449
 188,319
Precision Coatings 5,209
 12,867
 22,932
 38,407
 6,285
 5,603
 14,051
 13,648
Other 1,542
 2,009
 3,602
 4,573
 1,743
 908
 3,707
 1,818
Total $122,886
 $92,618
 $334,317
 $280,113
 $102,947
 $119,183
 $216,707
 $241,337
                
Value-added sales                
Performance Alloys and Composites $90,637
 $87,247
 $262,534
 $248,799
 $115,243
 $110,150
 $224,844
 $210,449
Advanced Materials 60,391
 45,960
 169,720
 135,019
 58,307
 57,267
 115,814
 115,550
Precision Coatings 21,896
 25,803
 67,810
 75,548
 23,089
 23,393
 45,626
 47,034
Other (1,542) (2,009) (3,602) (4,573) (1,743) (908) (3,707) (1,818)
Total $171,382
 $157,001
 $496,462
 $454,793
 $194,896
 $189,902
 $382,577
 $371,215
The cost of gold, silver, platinum, palladium, and copper can be quite volatile. Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.



24



Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.
By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals.




23



Segment Results
The Company consists of four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Other reportable segment includes unallocated corporate costs.
Performance Alloys and Composites
ThirdSecond Quarter
 Third Quarter Ended Second Quarter Ended
 Sept. 29, Sept. 30, $ % June 28, June 29, $ %
(Thousands) 2017 2016 Change Change 2019 2018 Change Change
Net sales $109,393
 $103,699
 $5,694
 5% $135,231
 $129,765
 $5,466
 4%
Value-added sales 90,637
 87,247
 3,390
 4% 115,243
 110,150
 5,093
 5%
Operating profit 6,786
 4,357
 2,429
 56% 19,328
 12,309
 7,019
 57%
Net sales from the Performance Alloys and Composites segment of $109.4$135.2 million in the thirdsecond quarter of 20172019 were 5%4% higher than net sales of $103.7$129.8 million in the thirdsecond quarter of 2016 primarily due to higher2018. Improved sales volume related tomix more than offset the industrial components, consumer electronics, and automotive electronics end markets. In addition, theunfavorable impact of higher pass-through metal prices favorably impacted net sales byof approximately $1.8$0.6 million.
Value-added sales of $90.6$115.2 million in the thirdsecond quarter of 20172019 were 4%5% higher than value-added sales of $87.2$110.2 million in the thirdsecond quarter of 2016.2018. The increase in value-added sales was driven by stronger demandperformance improvements in commercial execution in the aforementioned end markets of industrial components, consumer electronics, energy, and automotive electronics, partially offset by a $3.1 million reduction in raw material beryllium hydroxide sales.telecom and data center.
Performance Alloys and Composites generated operating profit of $6.8$19.3 million in the thirdsecond quarter of 20172019 compared to $4.4$12.3 million in the thirdsecond quarter of 2016.2018. The increase in operating profit was primarily due to higher sales volume, favorable product mix and productivity improvements.improved manufacturing performance.


NineSix Months
 Nine Months Ended Six Months Ended
 Sept. 29, Sept. 30, $ % June 28, June 29, $ %
(Thousands) 2017 2016 Change Change 2019 2018 Change Change
Net sales $310,487
 $292,024
 $18,463
 6% $262,344
 $248,001
 $14,343
 6%
Value-added sales 262,534
 248,799
 13,735
 6% 224,844
 210,449
 14,395
 7%
Operating profit 12,523
 6,103
 6,420
 105% 38,286
 22,170
 16,116
 73%
Net sales from the Performance Alloys and Composites segment of $310.5$262.3 million in the first ninesix months of 20172019 were 6% higher than net sales of $292.0$248.0 million in the first ninesix months of 2016 primarily due to increased demand in2018. Improved sales mix more than offset the industrial components and consumer electronics end markets. Theunfavorable impact of higher pass-through metal prices favorably impacted net sales byof approximately $5.9$2.1 million.



25



Value-added sales of $262.5$224.8 million in the first ninesix months of 20172019 were 6%7% higher than value-added sales of $248.8$210.4 million in the first ninesix months of 2016. Stronger demand in the consumer electronics and industrial components end markets increased value-added sales by $11.4 million compared to the first nine months of 2016. Also, the2018. The increase in value-added sales was driven by higher raw material salesperformance improvements in commercial execution in the end markets of beryllium hydroxide of $2.0 million.aerospace and defense, energy, and telecom and data center.
Performance Alloys and Composites generated operating profit of $12.5$38.3 million in the first ninesix months of 20172019 compared to $6.1$22.2 million in the first ninesix months of 2016.2018. The increase in operating profit was primarily due to higher sales volume, favorable product mix and productivity improvements.improved manufacturing performance.




24




Advanced Materials
ThirdSecond Quarter

Third Quarter Ended Second Quarter Ended


Sept. 29,
Sept. 30, $ % June 28, June 29, $ %
(Thousands)
2017
2016 Change Change 2019 2018 Change Change
Net sales
$157,770

$107,250
 50,520
 47% $133,238
 $150,324
 (17,086) (11)%
Value-added sales
60,391

45,960
 14,431
 31% 58,307
 57,267
 1,040
 2 %
Operating profit
9,756

8,245
 1,511
 18% 6,139
 5,572
 567
 10 %
Net sales from the Advanced Materials segment of $157.8$133.2 million in the thirdsecond quarter of 20172019 were 47% higher11% lower than net sales of $107.3$150.3 million in the thirdsecond quarter of 20162018. The decline in net sales was due to higher sales volume. Net salesthe lower mix of $38.6 million duringprecious metal-containing products and the third quartermix of 2017 were attributable to our HTB acquisition. Also, net sales increased due to higher sales volume offset bycustomer-supplied material, as well as the impact of lowerunfavorable pass-through metal prices of $4.7$1.4 million.
Value-added sales of $60.4$58.3 million in the thirdsecond quarter of 20172019 were 31%2% higher than value-added sales of $46.0$57.3 million in the thirdsecond quarter of 2016. This increase included value-added2018. Value-added sales of $11.4 million attributable to our HTB acquisition. Also,into the increase in value-added sales was driven by higher value-added salesindustrial and energy end markets contributed to the consumer electronicsyear-over-year increase, and more than offset softer demand in the semiconductor end market of $2.2 million due primarily to higher demand.market.
The Advanced Materials segment generated operating profit of $9.8$6.1 million in the thirdsecond quarter of 20172019 compared to $8.3$5.6 million in the thirdsecond quarter of 2016. Operating2018. Increased operating profit in the thirdsecond quarter of 20172019, compared to 2018, was favorably impactedthe result of cost savings realized primarily from restructuring actions taken in the fourth quarter of 2018, partially offset by higher sales volume.reduced manufacturing yields.


NineAdvanced Materials
Six Months
 Nine Months Ended Six Months Ended
 Sept. 29, Sept. 30, $ % June 28, June 29, $ %
(Thousands) 2017 2016 Change Change 2019 2018 Change Change
Net sales $429,550
 $328,927
 100,623
 31% $277,263
 $303,869
 (26,606) (9)%
Value-added sales 169,720
 135,019
 34,701
 26% 115,814
 115,550
 264
  %
Operating profit 24,873
 20,748
 4,125
 20% 13,219
 11,470
 1,749
 15 %
Net sales from the Advanced Materials segment of $429.6$277.3 million in the first ninesix months of 20172019 were 31% higher9% lower than net sales of $328.9$303.9 million in the first ninesix months of 2016. Net2018. The decline in net sales of $77.9 million during the first nine months of 2017 were attributablewas due to the HTB acquisition. Also, net sales increased due to a combinationlower mix of new product sales growthprecious metal-containing products and demand in the consumer electronics and defense end markets.mix of customer-supplied material, as well as the impact of unfavorable pass-through metal prices of $5.3 million.
Value-added sales of $169.7$115.8 million in the first ninesix months of 20172019 were 26% higher thanup slightly, compared to value-added sales of $135.0$115.6 million in the first ninesix months of 2016. This increase included2018. Increased value-added sales of $24.9 million attributable to our HTB acquisition. The increase ininto the industrial end market were offset by decreased value-added sales was also driven by higher value-added sales tointo the consumer electronicssemiconductor end market. Value-added sales to the consumer electronics end market, which represents approximately 49% of total segment value-added sales, increased $7.2 million due primarily to higher demand, excluding the HTB acquisition.
The Advanced Materials segment generated operating profit of $24.9$13.2 million in the first ninesix months of 20172019 compared to $20.7$11.5 million in the first ninesix months of 2016. As a percentage of value-added sales,2018. Increased operating profit was 15% in the first nine months of both 2017 and 2016. Operating profit in the first ninesix months of 20172019, compared to 2018, was favorably impactedthe result of cost savings realized primarily from restructuring actions taken in the fourth quarter of 2018, partially offset by higher sales volume.reduced manufacturing yields.








2526





Precision Coatings
ThirdSecond Quarter
(Thousands)
Third Quarter Ended Second Quarter Ended
Sept. 29,
Sept. 30, $ %June 28, June 29, $ %
2017
2016 Change Change2019 2018 Change Change
Net sales
$27,105

$38,670
 (11,565) (30)% $29,374
 $28,996
 378
 1 %
Value-added sales
21,896

25,803
 (3,907) (15)% 23,089
 23,393
 (304) (1)%
Operating profit
1,613

3,432
 (1,819) (53)% 3,937
 2,233
 1,704
 76 %
Net sales from the Precision Coatings segment of $27.1$29.4 million in the thirdsecond quarter of 2017 were 30% lower than2019 increased 1% compared to net sales of $38.7$29.0 million in the thirdsecond quarter of 20162018 primarily due to lowerthe favorable impact of pass-through precious metal prices of $1.2 million, partially offset by reduced sales volume.
Value-added sales of $21.9$23.1 million in the thirdsecond quarter of 2017 were 15% lower than2019 decreased 1% compared to value-added sales of $25.8$23.4 million in the thirdsecond quarter of 2016. The defense and2018. Increased value-added sales into the industrial components end markets increased $1.3 million primarily due to end market demand. This increase wasof $0.6 million were more than offset by a decrease of $4.9 million indecreased value-added sales into the medicalconsumer electronics and semiconductor end market due to lower volume in the blood glucose test strip segment of the medical end market.markets.
The Precision Coatings segment generated operating profit of $1.6$3.9 million in the thirdsecond quarter of 2017,2019, compared to an operating profit of $3.4$2.2 million in the thirdsecond quarter of 2016.2018. The decreaseincrease in operating profit was driven by lower sales volumefavorable mix and $0.4 million of cost reduction initiatives, primarily severance, associated with reducing headcount in Asia and North America.improved manufacturing performance, compared to the second quarter last year.
NineSix Months
(Thousands) Nine Months Ended Six Months Ended
Sept. 29, Sept. 30, $ %June 28, June 29, $ %
2017 2016 Change Change2019 2018 Change Change
Net sales $90,742
 $113,955
 (23,213) (20)% $59,677
 $60,682
 (1,005) (2)%
Value-added sales 67,810
 75,548
 (7,738) (10)% 45,626
 47,034
 (1,408) (3)%
Operating profit 6,145
 9,803
 (3,658) (37)% 6,014
 5,608
 406
 7 %
Net sales from the Precision Coatings segment of $90.7$59.7 million in the first ninesix months of 2017 were 20% lower than2019 decreased 2% compared to net sales of $114.0$60.7 million in the first ninesix months of 2016 primarily2018 due to lowerdecreased sales volume.volume, partially offset by a $2.4 million favorable impact of pass-through precious metal prices.
Value-added sales of $67.8$45.6 million in the first ninesix months of 2017 were 10% lower than2019 decreased 3% compared to value-added sales of $75.5$47.0 million in the first ninesix months of 2016. The defense2018. Value-added sales into the consumer electronics, semiconductor, and industrial componentsother end markets increased $3.6decreased $3.4 million, primarily due to strongerwhile sales into the industrial end market demand. This increase was more than offset by a decrease of $8.4 million in the medical end market due to lower volume in the blood glucose test strip segment of the medical end market.increased $2.1 million.
The Precision Coatings segment generated operating profit of $6.1$6.0 million in the first ninesix months of 20172019, compared to $9.8an operating profit of $5.6 million in the first ninesix months of 2016.2018. The decreaseincrease in operating profit inwas driven by favorable mix and improved manufacturing performance, compared to the first nine monthshalf of 2017 versus the comparable period of 2016 was due to lower sales volume, cost reduction initiatives of $0.4 million, and the absence of a gain on the sale of equipment of $0.8 million realized during the first nine months of 2016.last year.



26




Other
ThirdSecond Quarter
(Thousands) Third Quarter Ended Second Quarter Ended
Sept. 29, Sept. 30, $ % June 28, June 29, $ %
2017 2016 Change Change 2019 2018 Change Change
Net sales $
 $
 
  % $
 $
 
 %
Value-added sales (1,542) (2,009) 467
 (23)% (1,743) (908) (835) 92%
Operating loss (6,597) (5,883) (714) 12 % (6,654) (4,922) (1,732) 35%
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs of $6.6 million in the thirdsecond quarter of 20172019 increased $0.7$1.7 million as compared to $5.9$4.9 million in the thirdsecond quarter of 2016.2018. Corporate costs were 4%accounted for 3% of total Company value-added sales in the thirdsecond quarter of both 20172019 and 2016.2018. The increase in corporate costs was primarily duein the second quarter of 2019, compared to higher incentive compensation expensethe second quarter of 2018, is reflective of investments to execute strategic initiatives and variable costs associated with value-added sales and profit growth.improved financial performance.


Nine


27



Six Months
(Thousands) Nine Months Ended Six Months Ended
Sept. 29, Sept. 30, $ % June 28, June 29, $ %
2017 2016 Change Change 2019 2018 Change Change
Net sales $
 $
 
  % $
 $
 
 %
Value-added sales (3,602) (4,573) 971
 (21)% (3,707) (1,818) (1,889) 104%
Operating loss (18,829) (13,194) (5,635) 43 % (13,382) (10,805) (2,577) 24%

Corporate costs of $18.8$13.4 million in the first nine monthshalf of 20172019 increased $5.6$2.6 million as compared to $13.2$10.8 million in the first nine monthshalf of 2016. As a percent2018. Corporate costs accounted for 3% of total Company value-added sales corporate costs increased to 4% in the first nine monthshalf of 2017 from 3% in the prior-year.both 2019 and 2018. The increase in corporate costs was duein the first half of 2019, compared to higher incentive compensationthe first half of 2018, is reflective of investments to execute strategic initiatives and stock-based compensation expense of $5.5 million, which included $1.4 million due to accelerated stock compensation expensevariable costs associated with the transition of the Company's CEO.improved financial performance.

FINANCIAL POSITION
Cash Flow
A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows:
 Nine Months Ended Six Months Ended
 Sept. 29, Sept. 30, $ June 28, June 29, $
(Thousands) 2017 2016 Change 2019 2018 Change
Net cash provided by operating activities $35,497
 $27,222
 $8,275
 $30,046
 $29,304
 $742
Net cash used in investing activities (34,830) (27,620) (7,210) (15,409) (20,551) 5,142
Net cash used in financing activities (10,938) (8,556) (2,382) (10,326) (7,710) (2,616)
Effects of exchange rate changes 1,293
 524
 769
 (100) 8
 (108)
Net change in cash and cash equivalents $(8,978) $(8,430) $(548) $4,211
 $1,051
 $3,160
Net cash provided by operating activitiestotaled $35.5$30.0 million in the first ninesix months of 20172019 versus $27.2$29.3 million in the comparable prior-year period. Working capital requirements used cash of $13.5$29.3 million during the first ninesix months of 20172019 compared to a use of $18.7$15.8 million in the first ninesix months of 2016.2018. Cash flows used for accounts receivable were $1.8$0.3 million higherlower than the prior year-period due to the HTB acquisition. Our three-monthprior-year period. Three-month trailing days sales outstanding (DSO) was approximately 4043 days at September 29, 2017 versusJune 28, 2019 and 41 days at December 31, 2016.2018. Inventory reduction initiatives generated a cash flow benefit of $1.3 million in the first six months of 2019 compared to a benefit of $10.4 million in first six months of 2018, related primarily to our Performance Alloys and Composites business. Cash flows used for inventory increased $13.2 million primarily within the Performance Alloys and Composites and Advanced Materials segments to respond to anticipated orders and demand. Cash flows from accounts payable and accrued expenses provided cash of approximately $18.0were $18.8 million compared to athe prior-year period use of $2.2cash of $14.2 million due to higher incentive compensation payments tied to improved financial performance.
Net cash used in investing activities was $15.4 million in the first half of 2019 compared to $20.6 million in the prior-year period primarily due to a higher accounts payable balance due to the timinglower levels of payments and the HTB acquisition.



27



Net cash used in investing activities was $34.8 million in the first nine months of 2017 compared to $27.6 million in the prior-year period, reflecting a $16.5 million payment for the HTB acquisition offset by lower payments for property, plant, and equipment and mine development of $10.6 million.capital spending.
Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2017,2019, the Company expects payments for property,p



28



roperty, plant, and equipment to be less thanapproximately $30.0 million and mine development expenditures to be less than $3.0$5.0 million.
Net cash used in financing activities totaled $10.9$10.3 million in the first nine monthshalf of 20172019 versus $8.6$7.7 million used in financing activities in the comparable prior-year periodperiod. The increase in cash used is primarily due to a higher amountpayments of common shares withheldwithholding taxes for taxes in 2017 compared to 2016.stock-based compensation awards.
Liquidity
We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share repurchase programs,program, environmental remediation projects, and strategic acquisitions. At September 29, 2017,June 28, 2019, cash and cash equivalents held by our foreign operations totaled $11.5$17.8 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.
A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, and debt-to-debt-plus-equity ratio, as of September 29, 2017June 28, 2019 and December 31, 20162018 is as follows:
 September 29, December 31, June 28, December 31,
(Thousands) 2017 2016 2019 2018
Cash and cash equivalents $74,856
 $70,645
Total outstanding debt $4,007
 $4,615
 2,637
 3,041
Cash 22,486
 31,464
Net debt (cash) (18,479) (26,849)
Net cash $72,219
 $67,604
Available borrowing capacity $266,405
 $238,886
 $316,828
 $275,488
Debt-to-debt-plus-equity ratio 1% 1%
Net debt (cash)cash is a non-GAAP financial measure reflecting the Company's current liquiditymeasure. We are providing this information because we believe it is more indicative of our overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods. Non-GAAP financial measures, such as net debt (cash), have inherent limitations and should not be considered in isolation, or as a substitute for GAAP financial measures.
Total outstanding debt decreased $0.6 million compared to December 31, 2016.
The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.
The main cause for the increase in the available borrowing capacity at September 29, 2017 as compared to December 31, 2016 was due to increased earnings before interest, income taxes, depreciation and amortization on a trailing 12-month basis.
In 2015, we entered into an amendment to our $375.0 millionCompany's revolving credit agreement (Credit Agreement). The amendment extends the maturity date of the Credit Agreement from 2018 to expires in 2020 and provides more favorable pricing under certain circumstances. In addition, the amendment provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives. The Credit Agreement is secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets. The Credit Agreement allows us to borrow money at a premium over LIBOR or the prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the Credit Agreement.



28



agreement. The Credit Agreement includes restrictive covenants including incurringrelating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of September 29, 2017June 28, 2019 and December 31, 2016.2018. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.
Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. As a result, we have negotiated increases in the available capacity under existing lines, added additional lines, and extended the maturity dates of existing lines in recent years. The available and unused capacity under the metal financing lines expiring in September 2019 totaled approximately $149.3$154.3 million as of September 29, 2017.June 28, 2019 and $133.9 million as of December 31, 2018. The availability is determined by Board approved levels and actual line capacity.
In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given



29



year, and the repurchases may be discontinued at any time. In the first ninesix months of 2017,2019, we repurchased 32,4094,500 shares at a cost of $1.1our common stock for $0.2 million. We did not repurchase any of our common shares induring the thirdsecond quarter of 2017.2019. Since the approval of the repurchase plan, we have purchased 1,082,2641,096,264 shares at a total cost of $34.3$34.9 million.
In the third quarter and first nine months of 2017, weWe paid cash dividends of $2.0$2.3 million and $5.9$4.4 million respectively, on our common stock.stock in the second quarter and first six months of 2019, respectively. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We maintain the majority of the precious metals and copper 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. The notional value of off-balance sheet precious metals and copper was $300.7$295.7 million as of September 29, 2017,June 28, 2019, versus $194.8$316.1 million as of December 31, 2016.2018. We were in compliance with all of the covenants contained in the consignment agreements as of September 29, 2017June 28, 2019 and December 31, 2016.2018. For additional information on our contractual obligations, refer to our 2018 Annual Report on Form 10-K for the year ended December 31, 2016.10-K.


CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. For additional information regarding critical accounting policies, please refer to our 2018 Annual Report on Form 10-K10-K.
Impairment of Goodwill and Long-Lived Assets
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of first day of the year endedfourth quarter, which was September 29, 2018.

Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Goodwill within the Advanced Materials segment totaled $50.3 million as of December 31, 2016. There2018. Within the Precision Coatings segment, goodwill totaled $17.9 million and $20.6 million relating to the Precision Optics and Large Area Coatings (LAC) reporting units, respectively, as of December 31, 2018. The remaining $1.9 million was related to the Beryllium reporting unit within the Performance Alloys and Composites segment.

For the purpose of the goodwill impairment assessment, we have beenthe option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary. At the September 29, 2018 annual assessment date, we opted to bypass step zero and proceeded to perform a "step one" quantitative assessment for each of our reporting units. The results of the step one indicated that no material changesgoodwill impairment existed.

As of September 29, 2018, the Company determined that the fair value of LAC reporting unit exceeded the carrying value by approximately 50 percent, which indicated no impairment at that time. The sales growth assumption for LAC was based on expected future orders. A key input into our valuation analysis is our sales growth assumptions which can be impacted by increased competition, pricing pressures, and contract negotiations with new and existing customers. These factors impact both the timing and magnitude of sales of our products. Precious metal prices, particularly palladium used by our LAC reporting unit and its customer base, have fluctuated significantly in recent years. Palladium price movements have increased competitive pricing pressure in the LAC business. The key risk with the precious metal pricing volatility is the possibility that rising prices could deter our customers from purchasing our products, which would adversely affect our net sales and operating profit. If this sales volume decrease does materialize, and if we are unable to replace this volume with other sales growth, the Company may determine in connection with future impairment tests that some or all the carrying value of LAC's goodwill may be impaired due to our critical accounting policies subsequentinability to recover from competitive pricing pressures within the issuancemedical end market of LAC. Accordingly, based on current market prices, there is an increased risk of impairment related to our Form 10-K.LAC reporting unit. An impairment, the amount of the carrying value in excess of fair value, could be material and would reduce the Company's profitability in the period of the impairment charge.





30



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:


Actual net sales, operating rates, and margins for 2017;2019;

Our ability to effectively integrate the HTB acquisition;


The global economy;economy, including the impact of tariffs and trade agreements;


The impact of any U.S. Federal Government shutdowns and sequestrations;


The condition of the markets which we serve, whether defined geographically or by segment, with the major market segments being: semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, and science;telecom and data center;




29




Changes in product mix and the financial condition of customers;


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 identifying acquisition candidates and in acquiring and integrating such businesses;


The impact of the results of acquisitions on our ability to fully achieve 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;

The availability of adequate lines of credit and the associated interest rates;


Other financial and economic factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, 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, credit availability, and the impact of the Company’s stock price on the cost of incentive compensation plans;


The uncertainties related to the impact of war, terrorist activities, and acts of God;


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 success of the realignment of our businesses;

Our ability to strengthen our internal control over financial reporting and disclosure controls and procedures; and


The risk factors set forth in Part 1, Item 1A of our 2018 Annual Report on Form 10-K for the year ended December 31, 2016.10-K.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2018 Annual Report on Form 10-K for the year ended December 31, 2016.10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2018 Annual Report on Form 10-K.



31



Item 4.Controls and Procedures
a)Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with participation of the Company's management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of disclosure controls and procedures as of September 29, 2017June 28, 2019 pursuant to Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as



30



amended (Exchange Act). Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that disclosure controls and procedures are effective as of September 29, 2017.June 28, 2019.
b)Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 29, 2017June 28, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


As a result of the adoption of the new lease guidance on January 1, 2019, the Company implemented new processes and controls around its leasing arrangements.  These changes included creating new accounting policies, implementing a new software solution, and gathering information necessary for disclosures.





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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 cases alleging that plaintiffs have contracted, or have been placed at risk of contracting, beryllium sensitization or chronic beryllium disease or other lung conditions as a result of exposure to beryllium (beryllium cases). The plaintiffs in beryllium cases seek recovery under negligence and various other legal theories and demand compensatory and often punitive damages, in many cases of an unspecified sum. Spouses of some plaintiffs claim loss of consortium.
The information presented in the Legal Proceedings section of Note N ("Contingencies") of the Notes to Consolidated Financial Statements (Unaudited) is incorporated herein by reference.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to repurchases of common stock made by us during the three months ended September 29, 2017June 28, 2019.
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share (1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 through August 4, 2017
895

$38.42



$15,703,744
August 5 through September 1, 2017
401

38.16



15,703,744
September 1 through September 29, 2017
1,062

42.88



15,703,744
Total
2,358

$40.38



$15,703,744
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share (1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
March 30 through May 3, 2019


2,542

$44.97



$15,081,991
May 4 through May 31, 2019


9,686

67.54



15,081,991
June 1 through June 28, 2019


256

63.81



15,081,991
Total
12,484

$62.87



$15,081,991
(1)Includes 895, 401,2,542, 9,686, and 1,062256 shares surrendered to the Company in July, August,April, May, and September,June, respectively, by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.






(2)On January 14, 2014, we announced that our Board of Directors had authorized the repurchase of up to $50.0 million of our common stock. We did not repurchase any shares under this program during the thirdsecond quarter of 2017.2019. As of September 29, 2017, $15.7June 28, 2019, $15.1 million may still be purchased under the program.
Item 4.Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this quarterly report on Form 10-Q.






3233







Item 6.Exhibits


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 
95 
Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended September 29, 2017*June 28, 2019*
101.INS  XBRL Instance Document*Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
101.SCH  XBRL Taxonomy Extension Schema Document*
101.DEF  XBRL Taxonomy Extension Definition Linkbase 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*


*Submitted electronically herewith.






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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
   
Dated: October 26, 2017July 25, 2019    
    
/s/  Joseph P. Kelley
    Joseph P. Kelley
    Vice President, Finance and Chief Financial Officer
    (Principal Financial and Accounting Officer)






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