Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | Nine Months Ended | | | Six Months Ended |
| | Sept. 29, | | Sept. 30, | | | July 2, | | June 26, |
(Thousands) | | 2017 | | 2016 | (Thousands) | | 2021 | | 2020* |
Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net income | | $ | 19,683 |
| | $ | 18,962 |
| Net income | | $ | 34,635 | | | $ | 1,925 | |
Adjustments to reconcile net income to net cash provided from (used in) operating activities: | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation, depletion, and amortization | | 33,444 |
| | 34,379 |
| Depreciation, depletion, and amortization | | 19,063 | | | 23,522 | |
Amortization of deferred financing costs in interest expense | | 670 |
| | 417 |
| Amortization of deferred financing costs in interest expense | | 364 | | | 364 | |
Stock-based compensation expense (non-cash) | | 4,303 |
| | 2,880 |
| Stock-based compensation expense (non-cash) | | 3,512 | | | 3,966 | |
(Gain) loss on sale of property, plant, and equipment | | 207 |
| | (601 | ) | |
| Deferred income tax expense (benefit) | | 1,073 |
| | (676 | ) | Deferred income tax expense (benefit) | | 367 | | | (723) | |
Changes in assets and liabilities net of acquired assets and liabilities: | | | |
| |
Decrease (increase) in accounts receivable | | (21,572 | ) | | (19,781 | ) | |
Decrease (increase) in inventory | | (9,953 | ) | | 3,294 |
| |
Decrease (increase) in prepaid and other current assets | | (6,077 | ) | | (956 | ) | |
Increase (decrease) in accounts payable and accrued expenses | | 17,991 |
| | (2,207 | ) | |
Increase (decrease) in unearned revenue | | 4,746 |
| | (2,546 | ) | |
Increase (decrease) in interest and taxes payable | | (2,083 | ) | | 898 |
| |
Increase (decrease) in long-term liabilities | | (5,611 | ) | | (9,320 | ) | |
Impairment charges | | Impairment charges | | 0 | | | 10,766 | |
Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable
| | Accounts receivable
| | (13,941) | | | 5,331 | |
Inventory | | Inventory | | (40,651) | | | (18,446) | |
Prepaid and other current assets | | Prepaid and other current assets | | (1,718) | | | (7,264) | |
Accounts payable and accrued expenses | | Accounts payable and accrued expenses | | 28,403 | | | (7,634) | |
Unearned revenue | | Unearned revenue | | 3,246 | | | (257) | |
Interest and taxes payable
| | Interest and taxes payable
| | 2,868 | | | 1,058 | |
Unearned income due to customer prepayments | | Unearned income due to customer prepayments | | 8,043 | | | 26,713 | |
Other-net | | (1,324 | ) | | 2,479 |
| Other-net | | (126) | | | (2,888) | |
Net cash provided by operating activities | | 35,497 |
| | 27,222 |
| Net cash provided by operating activities | | 44,065 | | | 36,433 | |
Cash flows from investing activities: | | | | | Cash flows from investing activities: | |
Payments for purchase of property, plant, and equipment | | (17,759 | ) | | (20,052 | ) | Payments for purchase of property, plant, and equipment | | (57,712) | | | (32,034) | |
Payments for mine development | | (620 | ) | | (8,934 | ) | |
Payments for acquisition | | (16,504 | ) | | — |
| |
Proceeds from sale of property, plant, and equipment | | 53 |
| | 1,366 |
| Proceeds from sale of property, plant, and equipment | | 603 | | | 33 | |
Net cash used in investing activities | | (34,830 | ) | | (27,620 | ) | Net cash used in investing activities | | (57,109) | | | (32,001) | |
Cash flows from financing activities: | | | | | 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 |
| |
| Proceeds from borrowings under revolving credit agreement, net | | Proceeds from borrowings under revolving credit agreement, net | | 22,500 | | | 150,000 | |
Repayment of long-term debt | | (55,608 | ) | | (10,517 | ) | Repayment of long-term debt | | (1,654) | | | (428) | |
Principal payments under capital lease obligations | | (644 | ) | | (549 | ) | |
Principal payments under finance lease obligations | | Principal payments under finance lease obligations | | (1,512) | | | (626) | |
Cash dividends paid | | (5,903 | ) | | (5,601 | ) | Cash dividends paid | | (4,791) | | | (4,582) | |
Deferred financing costs | | (300 | ) | | (1,000 | ) | |
Common shares withheld for taxes | | (2,397 | ) | | (868 | ) | |
Repurchase of common stock | | (1,086 | ) | | (3,798 | ) | Repurchase of common stock | | 0 | | | (6,766) | |
Net cash used in financing activities | | (10,938 | ) | | (8,556 | ) | |
Payments of withholding taxes for stock-based compensation awards | | Payments of withholding taxes for stock-based compensation awards | | (3,021) | | | (2,025) | |
Net cash provided by financing activities | | Net cash provided by financing activities | | 11,522 | | | 135,573 | |
Effects of exchange rate changes | | 1,293 |
| | 524 |
| Effects of exchange rate changes | | (11) | | | 56 | |
Net change in cash and cash equivalents | | (8,978 | ) | | (8,430 | ) | Net change in cash and cash equivalents | | (1,533) | | | 140,061 | |
Cash and cash equivalents at beginning of period | | 31,464 |
| | 24,236 |
| Cash and cash equivalents at beginning of period | | 25,878 | | | 125,007 | |
Cash and cash equivalents at end of period | | $ | 22,486 |
| | $ | 15,806 |
| Cash and cash equivalents at end of period | | $ | 24,345 | | | $ | 265,068 | |
*Amounts for the period ended June 26, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.
The accompanying
See notes are an integral part of theto these consolidated financial statements.
Materion Corporation and Subsidiaries
Consolidated 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 Loss | | Other Equity | | Total* |
Balance at April 2, 2021 | 20,414 | | | (6,734) | | | $ | 264,940 | | | $ | 645,468 | | | $ | (206,845) | | | $ | (46,087) | | | $ | 3,860 | | | $ | 661,336 | |
Net income | — | | | — | | | 0 | | | 17,868 | | | 0 | | | 0 | | | 0 | | | 17,868 | |
Other comprehensive income | — | | | — | | | 0 | | | 0 | | | 0 | | | 3,003 | | | 0 | | | 3,003 | |
Cash dividends declared ($0.12 per share) | — | | | — | | | 0 | | | (2,453) | | | 0 | | | 0 | | | 0 | | | (2,453) | |
Stock-based compensation activity | 25 | | | 25 | | | 3,215 | | | (32) | | | (1,144) | | | 0 | | | 0 | | | 2,039 | |
Payments of withholding taxes for stock-based compensation awards | (2) | | | (2) | | | 0 | | | 0 | | | (183) | | | 0 | | | 0 | | | (183) | |
Directors’ deferred compensation | 1 | | | 1 | | | 50 | | | 0 | | | (682) | | | 0 | | | 723 | | | 91 | |
Balance at July 2, 2021 | 20,438 | | | (6,710) | | | $ | 268,205 | | | $ | 660,851 | | | $ | (208,854) | | | $ | (43,084) | | | $ | 4,583 | | | $ | 681,701 | |
| | | | | | | | | | | | | | | |
Balance at March 27, 2020 | 20,310 | | | (6,838) | | | $ | 253,967 | | | $ | 618,796 | | | $ | (198,311) | | | $ | (47,173) | | | $ | 3,490 | | | $ | 630,769 | |
Net income | — | | | — | | | 0 | | | 5,803 | | | 0 | | | 0 | | | 0 | | | 5,803 | |
Other comprehensive income | — | | | — | | | 0 | | | 0 | | | 0 | | | 1,602 | | | 0 | | | 1,602 | |
Cash dividends declared ($0.115 per share) | — | | | — | | | 0 | | | (2,337) | | | 0 | | | 0 | | | 0 | | | (2,337) | |
Stock-based compensation activity | 11 | | | 11 | | | 2,775 | | | (43) | | | (259) | | | 0 | | | 0 | | | 2,473 | |
Payments of withholding taxes for stock-based compensation awards | 0 | | | 0 | | | 0 | | | 0 | | | (10) | | | 0 | | | 0 | | | (10) | |
Directors’ deferred compensation | 1 | | | 1 | | | 14 | | | 0 | | | (146) | | | 0 | | | 188 | | | 56 | |
Balance at June 26, 2020 | 20,322 | | | (6,826) | | | $ | 256,756 | | | $ | 622,219 | | | $ | (198,726) | | | $ | (45,571) | | | $ | 3,678 | | | $ | 638,356 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 Loss | | Other Equity | | Total* |
Balance at December 31, 2020 | 20,328 | | | (6,820) | | | $ | 258,642 | | | $ | 631,058 | | | $ | (199,187) | | | $ | (38,639) | | | $ | 3,756 | | | $ | 655,630 | |
Net income | — | | | — | | | 0 | | | 34,635 | | | 0 | | | 0 | | | 0 | | | 34,635 | |
Other comprehensive loss | — | | | — | | | 0 | | | 0 | | | 0 | | | (4,445) | | | 0 | | | (4,445) | |
Cash dividends declared ($0.235 per share) | — | | | — | | | 0 | | | (4,791) | | | 0 | | | 0 | | | 0 | | | (4,791) | |
Stock-based compensation activity | 152 | | | 152 | | | 9,474 | | | (51) | | | (5,911) | | | 0 | | | 0 | | | 3,512 | |
Payments of withholding taxes for stock-based compensation awards | (45) | | | (45) | | | 0 | | | 0 | | | (3,021) | | | 0 | | | 0 | | | (3,021) | |
Directors’ deferred compensation | 3 | | | 3 | | | 89 | | | 0 | | | (735) | | | 0 | | | 827 | | | 181 | |
Balance at July 2, 2021 | 20,438 | | | (6,710) | | | $ | 268,205 | | | $ | 660,851 | | | $ | (208,854) | | | $ | (43,084) | | | $ | 4,583 | | | $ | 681,701 | |
| | | | | | | | | | | | | | | |
Balance at December 31, 2019 | 20,404 | | | (6,744) | | | $ | 249,674 | | | $ | 624,954 | | | $ | (186,845) | | | $ | (45,462) | | | $ | 3,422 | | | $ | 645,743 | |
Net income | — | | | — | | | 0 | | | 1,925 | | | 0 | | | 0 | | | 0 | | | 1,925 | |
Other comprehensive loss | — | | | — | | | 0 | | | 0 | | | 0 | | | (109) | | | 0 | | | (109) | |
Cash dividends declared ($0.225 per share) | — | | | — | | | 0 | | | (4,582) | | | 0 | | | 0 | | | 0 | | | (4,582) | |
Stock-based compensation activity | 110 | | | 110 | | | 7,037 | | | (78) | | | (2,902) | | | 0 | | | 0 | | | 4,057 | |
Payments of withholding taxes for stock-based compensation awards | (36) | | | (36) | | | 0 | | | 0 | | | (2,025) | | | 0 | | | 0 | | | (2,025) | |
Repurchase of shares | (158) | | | (158) | | | 0 | | | 0 | | | (6,766) | | | 0 | | | 0 | | | (6,766) | |
Directors’ deferred compensation | 2 | | | 2 | | | 45 | | | 0 | | | (188) | | | 0 | | | 256 | | | 113 | |
Balance at June 26, 2020 | 20,322 | | | (6,826) | | | $ | 256,756 | | | $ | 622,219 | | | $ | (198,726) | | | $ | (45,571) | | | $ | 3,678 | | | $ | 638,356 | |
*Amounts for the periods ended June 26, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.
See notes to these consolidated financial statements.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note A — Accounting Policies
(Dollars in thousands)
Basis of Presentation:In management’s opinion, theThe 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 20172021 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 20162020 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 thea 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 March 2016,
Change in Accounting Principle: During the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvementsfourth quarter of 2020, the Company elected to Employee Share-Based Payment Accountingchange its method for valuing its inventories at locations that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company believes that the FIFO method is preferable as it improves comparability with its most similar peers, it more closely resembles the physical flow of its inventory (i.e., which impacts several aspectsit provides better matching of accounting for share-based payment transactions, including income tax consequences, classificationrevenues and expenses), and it results in uniformity across a significant majority of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement, and the taxCompany’s inventory. The effects of exercised or vested awards will be treated as discretethe change in accounting principle from LIFO to FIFO were retrospectively applied. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the reporting period in which they occur. An entity will also recognize excess tax benefits regardlessCompany’s consolidated balance sheet as of whetherJune 26, 2020 and the benefit reduces taxes payable in the reporting period. Excess tax benefits will be classified, along with otherconsolidated statements of income, taxcomprehensive income, shareholders’ equity, and cash flows as an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. 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, 2016. The Company adopted the new guidance during the first quarter of 2017. An impact of adoption was the recognition 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, for the ninethree and six months ended September 30, 2016, cash flows from operating activities increased by $868 with a corresponding decreaseJune 26, 2020 were adjusted as necessary. For further information, refer 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.2020 Annual Report on Form 10-K.
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. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost 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
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements:
those periods, with early adoption permitted.
Consolidated Statement of Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands except per share amounts) | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
| | June 26, 2020 | | June 26, 2020 |
Selected Items | | As Reported | | As Adjusted | | Adjustment | | As Reported | | As Adjusted | | Adjustment |
Cost of sales | | $ | 223,378 | | | $ | 224,513 | | | $ | 1,135 | | | $ | 455,749 | | | $ | 457,889 | | | $ | 2,140 | |
Gross margin | | 48,090 | | | 46,955 | | | (1,135) | | | 93,665 | | | 91,525 | | | (2,140) | |
Operating profit | | 8,706 | | | 7,571 | | | (1,135) | | | 4,143 | | | 2,003 | | | (2,140) | |
Income before income taxes | | 8,298 | | | 7,163 | | | (1,135) | | | 4,433 | | | 2,293 | | | (2,140) | |
Income tax expense | | 1,620 | | | 1,360 | | | (260) | | | 858 | | | 368 | | | (490) | |
Net income | | 6,678 | | | 5,803 | | | (875) | | | 3,575 | | | 1,925 | | | (1,650) | |
Basic earnings per share: | | | | | | | | | | | | |
Net income per share of common stock | | $ | 0.33 | | | $ | 0.29 | | | $ | (0.04) | | | $ | 0.18 | | | $ | 0.09 | | | $ | (0.09) | |
Diluted earnings per share: | | | | | | | | | | | | |
Net income per share of common stock | | $ | 0.32 | | | $ | 0.28 | | | $ | (0.04) | | | $ | 0.17 | | | $ | 0.09 | | | $ | (0.08) | |
Consolidated Statement of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
| | June 26, 2020 | | June 26, 2020 |
Selected Items | | As Reported | | As Adjusted | | Adjustment | | As Reported | | As Adjusted | | Adjustment |
Net income | | $ | 6,678 | | | $ | 5,803 | | | $ | (875) | | | $ | 3,575 | | | $ | 1,925 | | | $ | (1,650) | |
Comprehensive income | | 8,280 | | | 7,405 | | | (875) | | | 3,466 | | | 1,816 | | | (1,650) | |
Consolidated Statement of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
(Thousands) | | |
| | Six Months Ended |
| | June 26, 2020 |
Selected Items | | As Reported | | As Adjusted | | Adjustment |
Net income | | $ | 3,575 | | | $ | 1,925 | | | $ | (1,650) | |
Deferred income tax benefit | | (234) | | | (723) | | | (489) | |
Increase in inventory | | (20,585) | | | (18,446) | | | 2,139 | |
New Pronouncements Adopted: In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing various exceptions, such as the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments should be applied retrospectivelyin this update also simplify the accounting for income taxes related to income-based franchise taxes and require that an entity reflect enacted tax laws or rates in the presentationannual effective tax rate computation in the interim period that includes the enactment date. The Company adopted the standard on January 1, 2021. The adoption did not materially impact the Company's financial statements or disclosures.
New Accounting Guidance Issued and Not Yet Adopted:In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of service costthe Effects of Reference Rate Reform on Financial Reporting. This guidance is intended
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other components of net benefit costinterbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on the income statement and prospectively for the capitalization of service cost and net periodic postretirement benefits in assets.December 31, 2022. The Company is currently evaluating the impactassessing which 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 guidancevarious contracts will require lessees to report their operating leases as both an assetupdate for a new reference rate, and liability onwill determine 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 effectivetiming 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,guidance at the Company is in the processcompletion 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.that analysis.
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 — AcquisitionsAcquisition
Business acquisitions have been accounted for using the acquisition method, with acquired assets and assumed liabilities recognized at their respective fair values as of the acquisition date. The cost in excess of the net assets of the business acquired is included in goodwill.
On February 28, 2017,July 17, 2020, the Company completed the acquisition of Optics Balzers AG (Optics Balzers), an industry leader in thin film optical coatings. The purchase price for Optics Balzers was $136.1 million, including the assumption of $22.5 million of debt. The transaction was funded with cash on hand. Based on the fair value of assets acquired the target materials businessand liabilities assumed, goodwill of the Heraeus Group (HTB),$70.8 million and identifiable intangible assets of Hanau, Germany, for $16.5 million.$49.3 million were recorded. Goodwill associated with this acquisition is not tax deductible. This business manufactures precious and non-precious metal target materials for the architectural and automotive glass, electronic display, photovoltaic, and semiconductor markets at facilitiesacquisition is being reported in Germany, Taiwan, and the United States. This business operates within the Advanced Materialsour Precision Optics segment and the results of operationsOptics Balzers are included as of the date of acquisition.
Materion Corporation and Subsidiaries
Notesnot material to our Consolidated Financial Statements
(Unaudited)
The Company will makeStatements. NaN material measurement period adjustments tohave been recorded during the second quarter or first six months of 2021. As of July 2, 2021, the purchase price allocation prior to completion of the measurement period,remains preliminary 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 assets | 1,107 |
|
Long-term deferred income taxes | 1,450 |
|
Property, plant, and equipment | 7,637 |
|
Intangible assets | 3,236 |
|
Goodwill | 2,605 |
|
Total assets acquired | $ | 23,256 |
|
| |
Liabilities: | |
Other liabilities and accrued items | $ | 1,030 |
|
Other long-term liabilities | 430 |
|
Retirement and post-employment benefits | 5,292 |
|
Total liabilities assumed | $ | 6,752 |
|
| |
Total purchase price | $ | 16,504 |
|
As part of the acquisition, the Company recorded approximately $2.6 millioncompletes its assessments 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:income taxes.
|
| | | | | | |
(Thousands) | | Value at Acquisition | | Useful Life |
Customer relationships | | $ | 1,861 |
| | 15 years |
Technology | | 1,375 |
| | 3 years |
Total | | $ | 3,236 |
| | |
Note C — Segment Reporting
The Company has the following operatingreportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings,Optics, 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,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, and beryllia ceramics, and bulk metallic glass materials.ceramics.
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, and braze materials, and ultra-fine wire.materials.
Precision CoatingsOptics produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.
The Other reportable segment includes unallocated corporate costs and assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Performance Alloys and Composites | | Advanced Materials | | Precision Optics | | Other | | Total |
Second Quarter 2021 | | | | | | | | | | |
Net sales | | $ | 125,294 | | | $ | 213,114 | | | $ | 32,591 | | | $ | 0 | | | $ | 370,999 | |
Intersegment sales | | 10 | | | 3,185 | | | 0 | | | 0 | | | 3,195 | |
Operating profit (loss) | | 17,314 | | | 8,333 | | | 2,626 | | | (7,550) | | | 20,723 | |
Second Quarter 2020 | | | | | | | | | | |
Net sales | | $ | 101,614 | | | $ | 150,108 | | | $ | 19,746 | | | $ | 0 | | | $ | 271,468 | |
Intersegment sales | | (213) | | | 8,997 | | | 0 | | 0 | | 8,784 | |
Operating profit (loss) | | 6,824 | | | 4,653 | | | 2,091 | | | (5,997) | | | 7,571 | |
| | | | | | | | | | |
First Six Months 2021 | | | | | | | | | | |
Net sales | | $ | 239,437 | | | $ | 417,758 | | | $ | 68,190 | | | $ | 0 | | | $ | 725,385 | |
Intersegment sales | | 15 | | | 5,872 | | | 0 | | | 0 | | | 5,887 | |
Operating profit (loss) | | 30,805 | | | 17,266 | | | 7,184 | | | (14,814) | | | 40,441 | |
First Six Months 2020 | | | | | | | | | | |
Net sales | | $ | 200,681 | | | $ | 310,273 | | | $ | 38,460 | | | $ | 0 | | | $ | 549,414 | |
Intersegment sales | | 2 | | | 18,188 | | | 0 | | 0 | | 18,190 | |
Operating profit (loss) | | 10,347 | | | 9,703 | | | (7,501) | | | (10,546) | | | 2,003 | |
|
| | | | | | | | | | | | | | | | | | | | |
(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 |
|
The following table disaggregates revenue for each segment by end market for the second quarter and first six months of 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Performance Alloys and Composites | | Advanced Materials | | Precision Optics | | Other | | Total |
Second Quarter 2021 | | | | | | | | | | |
End Market | | | | | | | | | | |
Semiconductor | | $ | 1,806 | | | $ | 166,968 | | | $ | 563 | | | $ | 0 | | | $ | 169,337 | |
Industrial | | 30,264 | | | 10,687 | | | 7,634 | | | 0 | | | 48,585 | |
Aerospace and defense | | 19,250 | | | 1,660 | | | 5,597 | | | 0 | | | 26,507 | |
Consumer electronics | | 10,722 | | | 266 | | | 6,964 | | | 0 | | | 17,952 | |
Automotive | | 25,766 | | | 1,757 | | | 2,107 | | | 0 | | | 29,630 | |
Energy | | 4,880 | | | 24,216 | | | 0 | | | 0 | | | 29,096 | |
Telecom and data center | | 13,025 | | | 39 | | | 0 | | | 0 | | | 13,064 | |
Other | | 19,581 | | | 7,521 | | | 9,726 | | | 0 | | | 36,828 | |
Total | | $ | 125,294 | | | $ | 213,114 | | | $ | 32,591 | | | $ | 0 | | | $ | 370,999 | |
| | | | | | | | | | |
Second Quarter 2020 | | | | | | | | | | |
End Market | | | | | | | | | | |
Semiconductor | | $ | 1,537 | | | $ | 123,908 | | | $ | 232 | | | $ | 0 | | | $ | 125,677 | |
Industrial | | 23,831 | | | 8,419 | | | 2,574 | | | 0 | | | 34,824 | |
Aerospace and defense | | 17,952 | | | 1,650 | | | 4,119 | | | 0 | | | 23,721 | |
Consumer electronics | | 9,956 | | | 21 | | | 3,404 | | | 0 | | | 13,381 | |
Automotive | | 16,415 | | | 1,186 | | | 7 | | | 0 | | | 17,608 | |
Energy | | 5,590 | | | 9,327 | | | 0 | | | 0 | | | 14,917 | |
Telecom and data center | | 12,586 | | | 788 | | | 0 | | | 0 | | | 13,374 | |
Other | | 13,747 | | | 4,809 | | | 9,410 | | | 0 | | | 27,966 | |
Total | | $ | 101,614 | | | $ | 150,108 | | | $ | 19,746 | | | $ | 0 | | | $ | 271,468 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | Performance Alloys and Composites | | Advanced Materials | | Precision Optics | | Other | | Total |
First Six Months 2021 | | | | | | | | | | |
End Market | | | | | | | | | | |
Semiconductor | | $ | 2,803 | | | $ | 322,029 | | | $ | 1,034 | | | $ | 0 | | | $ | 325,866 | |
Industrial | | 54,294 | | | 23,277 | | | 15,009 | | | 0 | | | 92,580 | |
Aerospace and defense | | 41,092 | | | 3,058 | | | 12,173 | | | 0 | | | 56,323 | |
Consumer electronics | | 20,766 | | | 431 | | | 16,424 | | | 0 | | | 37,621 | |
Automotive | | 49,273 | | | 3,426 | | | 4,300 | | | 0 | | | 56,999 | |
Energy | | 9,017 | | | 51,406 | | | 0 | | | 0 | | | 60,423 | |
Telecom and data center | | 24,368 | | | 109 | | | 0 | | | 0 | | | 24,477 | |
Other | | 37,824 | | | 14,022 | | | 19,250 | | | 0 | | | 71,096 | |
Total | | $ | 239,437 | | | $ | 417,758 | | | $ | 68,190 | | | $ | 0 | | | $ | 725,385 | |
| | | | | | | | | | |
First Six Months 2020 | | | | | | | | | | |
End Market | | | | | | | | | | |
Semiconductor | | $ | 2,443 | | | $ | 244,727 | | | $ | 243 | | | $ | 0 | | | $ | 247,413 | |
Industrial | | 47,171 | | | 16,781 | | | 5,671 | | | 0 | | | 69,623 | |
Aerospace and defense | | 32,158 | | | 3,077 | | | 9,228 | | | 0 | | | 44,463 | |
Consumer electronics | | 24,651 | | | 138 | | | 6,946 | | | 0 | | | 31,735 | |
Automotive | | 34,579 | | | 3,266 | | | 24 | | | 0 | | | 37,869 | |
Energy | | 11,019 | | | 32,795 | | | 0 | | | 0 | | | 43,814 | |
Telecom and data center | | 22,575 | | | 1,658 | | | 0 | | | 0 | | | 24,233 | |
Other | | 26,085 | | | 7,831 | | | 16,348 | | | 0 | | | 50,264 | |
Total | | $ | 200,681 | | | $ | 310,273 | | | $ | 38,460 | | | $ | 0 | | | $ | 549,414 | |
Intersegment sales are eliminated in consolidation.
Note D — Other-netRevenue Recognition
Other-net expense
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 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 July 2, 2021. Remaining performance obligations include non-cancelable 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 third quarter and first nine monthspractical expedient at July 2, 2021, the aggregate amount of 2017 and 2016 is summarized as follows:the transaction price allocated to remaining performance obligations was approximately $78.1 million.
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
13
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Contract Balances: The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Thousands) | | July 2, 2021 | | December 31, 2020 | | $ change | | % change |
Accounts receivable, trade | | $ | 169,279 | | | $ | 156,821 | | | $ | 12,458 | | | 8 | % |
Unbilled receivables | | 10,682 | | | 8,832 | | | 1,850 | | | 21 | % |
Unearned revenue | | 10,920 | | | 7,713 | | | 3,207 | | | 42 | % |
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 first six months of 2021.
Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are generally 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 $3.2 million of the December 31, 2020 unearned amounts as revenue during the first six months of 2021.
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 E — Other-net
Other-net for the second quarter and first six months of 2021 and 2020 is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
| | July 2, | | June 26, | | July 2, | | June 26, |
(Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Metal consignment fees | | $ | 2,464 | | | $ | 2,037 | | | $ | 4,614 | | | $ | 4,266 | |
Amortization of intangible assets | | 1,005 | | | 106 | | | 2,178 | | | 294 | |
Foreign currency (gain) loss | | (33) | | | (2,486) | | | 1,216 | | | (2,548) | |
Net loss (gain) on disposal of fixed assets | | 24 | | | 9 | | | (364) | | | 55 | |
Other items | | 734 | | | (23) | | | 1,024 | | | (145) | |
Total | | $ | 4,194 | | | $ | (357) | | | $ | 8,668 | | | $ | 1,922 | |
Note F — Restructuring
During 2020, the Company determined it would close its Large Area Coatings (LAC) business (a reporting unit in the Precision Optics segment). The closure was substantially completed by the end of the first quarter of 2021. Income of $0.4 million was recorded in the first quarter of 2021, primarily related to lower than previously estimated facility closure costs that were recorded in 2020.
Remaining severance payments are immaterial and reflected in Salaries and wages in the Consolidated Balance Sheet as of July 2, 2021. Any additional costs related to the closure of this business are expected to be immaterial.
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,addition, during 2020, the Company initiated a restructuring plan to close the Fukuya, Japan service center, which is a part of thein its Performance Alloys and Composites segment.segment to close its Warren, Michigan and Fremont, California locations. 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 $0.5totaled $2.4 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.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
$4.6 million in the second quarter and first six months of 2020, respectively. In the second quarter of 2020, these costs included $0.9 million of severance associated with approximately 60 employees and $1.5 million of facility and other related costs. Included in restructuring charges for the first six months of 2020 was $1.4 million of severance associated with approximately 60 employees and $3.1 million of facility and other related costs.
Remaining severance payments of $0.1 million and facility costs of $0.5 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items, respectively, in the Consolidated Balance Sheet and are expected to be substantially paid in the next twelve months.
Note G — Income Taxes
The Company's effective tax rate for the second quarter of 2021 and 2020 was 15.5% and 19.0%, respectively, and 16.3% and 16.0% in the first six months of 2021 and 2020, respectively. The effective tax rate for each period in 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits, and the foreign derived intangible income deduction. The effective tax rate for each period in 2020 was lower than the statutory rate primarily due to the impact of percentage depletion and research and development credits. The effective tax rate for the first six months of 2021 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based compensation awards. The effective tax rate for the first six months of 2020 included a net discrete income tax expense of $0.8 million, primarily related to an impairment of goodwill.
On March 11, 2021, President Biden signed the American Rescue Plan (the Rescue Plan) into law. The Rescue Plan, among other things, extends and enhances a number of current-law tax incentives for businesses. While the Company continues to examine the impacts the Rescue Plan may have on its business, it does not expect it will have a material impact to its consolidated financial statements.
Note H — Earnings Per Share (EPS)
The following table sets forth the computation of basic and diluted EPS:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
| | July 2, | | June 26, | | July 2, | | June 26, |
(Thousands, except per share amounts) | | 2021 | | 2020 | | 2021 | | 2020 |
Numerator for basic and diluted EPS: | | | | | | | | |
Net income | | $ | 17,868 | | | $ | 5,803 | | | $ | 34,635 | | | $ | 1,925 | |
Denominator: | | | | | | | | |
Denominator for basic EPS: | | | | | | | | |
Weighted-average shares outstanding | | 20,429 | | | 20,317 | | | 20,402 | | | 20,350 | |
Effect of dilutive securities: | | | | | | | | |
Stock appreciation rights | | 79 | | | 36 | | | 75 | | | 36 | |
Restricted stock units | | 93 | | | 63 | | | 108 | | | 80 | |
Performance-based restricted stock units | | 50 | | | 138 | | | 62 | | | 121 | |
Diluted potential common shares | | 222 | | | 237 | | | 245 | | | 237 | |
Denominator for diluted EPS: | | | | | | | | |
Adjusted weighted-average shares outstanding | | 20,651 | | | 20,554 | | | 20,647 | | | 20,587 | |
Basic EPS | | $ | 0.87 | | | $ | 0.29 | | | $ | 1.70 | | | $ | 0.09 | |
Diluted EPS | | $ | 0.87 | | | $ | 0.28 | | | $ | 1.68 | | | $ | 0.09 | |
|
| | | | | | | | | | | | | | | | |
| | 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)Adjusted weighted-average shares outstanding - diluted exclude securities totaling 219,29252,709 and 982,588191,500 for the quarters ended September 29, 2017July 2, 2021 and September 30, 2016,June 26, 2020, respectively and 370,91764,478 and 993,418230,893 for the ninesix months ended September 29, 2017July 2, 2021 and September 30, 2016, respectively,June 26, 2020, respectively. These securities are primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices greater than the average market price of the Company's common shares and were excluded from the dilution calculation as theirthe effect would have been anti-dilutive.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note HI — Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:
| | | | Sept. 29, | | Dec. 31, | | July 2, | | December 31, |
(Thousands) | | 2017 | | 2016 | (Thousands) | | 2021 | | 2020 |
Raw materials and supplies | | $ | 44,924 |
| | $ | 36,233 |
| Raw materials and supplies | | $ | 67,281 | | | $ | 42,905 | |
Work in process | | 181,553 |
| | 169,327 |
| Work in process | | 172,425 | | | 156,093 | |
Finished goods | | 37,671 |
| | 38,147 |
| Finished goods | | 51,033 | | | 51,780 | |
Subtotal | | $ | 264,148 |
| | $ | 243,707 |
| |
Less: LIFO reserve balance | | 43,925 |
| | 42,842 |
| |
Inventories | | $ | 220,223 |
| | $ | 200,865 |
| |
Inventories, net | | Inventories, net | | $ | 290,739 | | | $ | 250,778 | |
The liquidationCompany maintains the majority of lastthe precious metals and copper used in firstproduction on a consignment basis in order to reduce its exposure to metal price movements and to reduce its working capital investment. The notional value of off-balance sheet precious metals and copper was $456.3 million and $400.0 million as of July 2, 2021 and December 31, 2020, respectively. Amounts for the year ended December 31, 2020 have been revised to reflect a $44.6 million reclassification out (LIFO) inventory layers did not impact cost of saleswork in process and into finished goods inventory.
Note J — Customer Prepayments
The Company entered into investment and master supply agreements with a customer to procure equipment to manufacture product for the customer. The customer is providing prepayments to the Company in the thirdamount of approximately $70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer. The Company will own the equipment and be responsible for operating and maintenance costs. The prepayment from the customer will be applied when commercial production of the product is sold and delivered to the customer in connection with a master supply agreement. Accordingly, as of July 2, 2021 and December 31, 2020, $66.9 million and $58.8 million, respectively, of prepayments are classified as Unearned Income in the Consolidated Balance Sheet, of which $2.2 million and $8.0 million, respectively, was received during the second quarter of 2017 or 2016. In theand first ninesix months of 2017, cost of sales were increased by $0.2 million. In the first nine months of 2016, cost of sales were reduced by $3.2 million.2021.
Note IK — Pensions and Other Post-employment Benefits
The following is a summary of the net periodic benefit cost for the thirdsecond quarter and first ninesix months of 20172021 and 20162020 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 |
| | July 2, | | June 26, | | July 2, | | June 26, |
(Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Components of net periodic benefit (credit) cost | | | | | | | | |
Service cost | | $ | 0 | | | $ | 0 | | | $ | 20 | | | $ | 15 | |
Interest cost | | 987 | | | 1,215 | | | 29 | | | 53 | |
Expected return on plan assets | | (2,234) | | | (2,205) | | | 0 | | | 0 | |
Amortization of prior service cost (benefit) | | 0 | | | 0 | | | (375) | | | (374) | |
Amortization of net loss (gain) | | 417 | | | 284 | | | (68) | | | (83) | |
Net periodic benefit (credit) cost | | $ | (830) | | | $ | (706) | | | $ | (394) | | | $ | (389) | |
Settlements | | 0 | | | 94 | | | 0 | | | 0 | |
Total net benefit (credit) cost | | $ | (830) | | | $ | (612) | | | $ | (394) | | | $ | (389) | |
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, | | July 2, | | June 26, | | July 2, | | June 26, |
(Thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | (Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Components of net periodic benefit cost (benefit) |
|
|
|
|
|
|
|
| |
Components of net periodic benefit (credit) cost | | Components of net periodic benefit (credit) cost | | | | | | | | |
Service cost |
| $ | 2,106 |
|
| $ | 1,946 |
|
| $ | 23 |
|
| $ | 26 |
| Service cost | | $ | 0 | | | $ | 0 | | | $ | 40 | | | $ | 31 | |
Interest cost |
| 2,372 |
|
| 2,595 |
|
| 99 |
|
| 140 |
| Interest cost | | 1,973 | | | 2,429 | | | 58 | | | 107 | |
Expected return on plan assets |
| (3,678 | ) |
| (3,488 | ) |
| — |
|
| — |
| Expected return on plan assets | | (4,468) | | | (4,410) | | | 0 | | | 0 | |
Amortization of prior service benefit |
| (42 | ) |
| (115 | ) |
| (374 | ) |
| (374 | ) | |
Amortization of net loss |
| 1,623 |
|
| 1,431 |
|
| — |
|
| — |
| |
Net periodic benefit cost (benefit) |
| $ | 2,381 |
|
| $ | 2,369 |
|
| $ | (252 | ) |
| $ | (208 | ) | |
| | | | | | | | | |
| | 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 | ) | |
Amortization of prior service cost (benefit) | | Amortization of prior service cost (benefit) | | 0 | | | 0 | | | (749) | | | (749) | |
Amortization of net loss (gain) | | Amortization of net loss (gain) | | 835 | | | 568 | | | (137) | | | (166) | |
Net periodic benefit (credit) cost | | Net periodic benefit (credit) cost | | $ | (1,660) | | | $ | (1,413) | | | $ | (788) | | | $ | (777) | |
Settlements | | Settlements | | 0 | | | 94 | | | 0 | | | 0 | |
Total net benefit (credit) cost | | Total net benefit (credit) cost | | $ | (1,660) | | | $ | (1,319) | | | $ | (788) | | | $ | (777) | |
The Company madedid not make any contributions to theits domestic defined benefit pension plan of $8.0 million and $12.0 million in the second quarter or first ninesix months of 2017 and 2016, respectively.2021 or 2020.
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 (income) expense.
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 froze the pay and service amounts used to calculate pension benefits for each projected benefit paymentactive participants in the calculation. Historically, the Company used a weighted-average approachpension plan as of January 1, 2020.
Materion Corporation and Subsidiaries
Notes 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 2017 associated with this change approximated $0.3 million and $0.8 million during the third quarter and first nine months of 2017, respectively, and is expected to total approximately $1.0 million.Consolidated Financial Statements
Note JL — Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the thirdsecond quarter and first ninesix months of 20172021 and 20162020 are as follows:
| | | | 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 | (Thousands) | | Foreign Currency | | Precious Metals | | Copper | | 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 | ) | |
Balance at April 2, 2021 | | Balance at April 2, 2021 | | $ | 1,462 | | | $ | 320 | | | $ | 280 | | | $ | 2,062 | | | $ | (43,309) | | | $ | (4,840) | | | $ | (46,087) | |
Other comprehensive income (loss) before reclassifications |
| (324 | ) |
| (205 | ) |
| (529 | ) |
| — |
|
| 271 |
|
| (258 | ) | Other comprehensive income (loss) before reclassifications | | 183 | | | (239) | | | 1,145 | | | 1,089 | | | 0 | | | 3,193 | | | 4,282 | |
Amounts reclassified from accumulated other comprehensive income |
| 433 |
|
| (94 | ) |
| 339 |
|
| 1,345 |
|
| — |
|
| 1,684 |
| |
Amounts reclassified from accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | 0 | | | 65 | | | (1,507) | | | (1,442) | | | 77 | | | 0 | | | (1,365) | |
Net current period other comprehensive (loss) income before tax | | Net current period other comprehensive (loss) income before tax | | 183 | | | (174) | | | (362) | | | (353) | | | 77 | | | 3,193 | | | 2,917 | |
Deferred taxes | | Deferred taxes | | 42 | | | (40) | | | (82) | | | (80) | | | (6) | | | 0 | | | (86) | |
Net current period other comprehensive (loss) income after tax | | Net current period other comprehensive (loss) income after tax | | 141 | | | (134) | | | (280) | | | (273) | | | 83 | | | 3,193 | | | 3,003 | |
Balance at July 2, 2021 | | Balance at July 2, 2021 | | $ | 1,603 | | | $ | 186 | | | $ | 0 | | | $ | 1,789 | | | $ | (43,226) | | | $ | (1,647) | | | $ | (43,084) | |
| Balance at March 27, 2020 | | Balance at March 27, 2020 | | $ | 1,214 | | | $ | (841) | | | $ | (330) | | | $ | 43 | | | $ | (41,330) | | | $ | (5,886) | | | $ | (47,173) | |
Other comprehensive (loss) income before reclassifications | | Other comprehensive (loss) income before reclassifications | | (201) | | | (411) | | | 426 | | | (186) | | | 0 | | | 1,166 | | | 980 | |
Amounts reclassified from accumulated other comprehensive income (loss) | | Amounts reclassified from accumulated other comprehensive income (loss) | | 8 | | | 491 | | | 132 | | | 631 | | | 70 | | | 0 | | | 701 | |
Net current period other comprehensive (loss) income before tax | | Net current period other comprehensive (loss) income before tax | | (193) | | | 80 | | | 558 | | | 445 | | | 70 | | | 1,166 | | | 1,681 | |
Deferred taxes | | Deferred taxes | | (44) | | | 18 | | | 124 | | | 98 | | | (19) | | | 0 | | | 79 | |
Net current period other comprehensive (loss) income after tax | | Net current period other comprehensive (loss) income after tax | | (149) | | | 62 | | | 434 | | | 347 | | | 89 | | | 1,166 | | | 1,602 | |
Balance at June 26, 2020 | | Balance at June 26, 2020 | | $ | 1,065 | | | $ | (779) | | | $ | 104 | | | $ | 390 | | | $ | (41,241) | | | $ | (4,720) | | | $ | (45,571) | |
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gains and Losses on Cash Flow Hedges | | | | | | |
(Thousands) | | Foreign Currency | | Precious Metals | | Total | | Pension and Post-Employment Benefits | | Foreign Currency Translation | | Total |
Net current period other comprehensive income (loss) before tax |
| 109 |
|
| (299 | ) |
| (190 | ) |
| 1,345 |
|
| 271 |
|
| 1,426 |
|
Deferred taxes on current period activity |
| 41 |
|
| (111 | ) |
| (70 | ) |
| 464 |
|
| — |
|
| 394 |
|
Net current period other comprehensive income (loss) after tax |
| 68 |
|
| (188 | ) |
| (120 | ) |
| 881 |
|
| 271 |
|
| 1,032 |
|
Balance at September 29, 2017 |
| $ | 1,177 |
|
| $ | (95 | ) |
| $ | 1,082 |
|
| $ | (79,961 | ) |
| $ | (4,011 | ) |
| $ | (82,890 | ) |
| | | | | | | | | | | | |
Balance at July 1, 2016 | | $ | 958 |
| | $ | — |
| | $ | 958 |
| | $ | (74,546 | ) | | $ | (3,037 | ) | | $ | (76,625 | ) |
Other comprehensive income (loss) before reclassifications | | (126 | ) | | — |
| | (126 | ) | | — |
| | 467 |
| | 341 |
|
Amounts reclassified from accumulated other comprehensive income | | 336 |
| | — |
| | 336 |
| | 1,015 |
| | — |
| | 1,351 |
|
Net current period other comprehensive income (loss) before tax | | 210 |
| | — |
| | 210 |
| | 1,015 |
| | 467 |
| | 1,692 |
|
Deferred taxes on current period activity | | 78 |
| | — |
| | 78 |
| | 342 |
| | — |
| | 420 |
|
Net current period other comprehensive income (loss) after tax | | 132 |
| | — |
| | 132 |
| | 673 |
| | 467 |
| | 1,272 |
|
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 | ) |
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 December 31, 2020 | | $ | 519 | | | $ | (170) | | | $ | 468 | | | $ | 817 | | | $ | (43,473) | | | $ | 4,017 | | | $ | (38,639) | |
Other comprehensive income (loss) before reclassifications | | 1,268 | | | 502 | | | 2,436 | | | 4,206 | | | 0 | | | (5,664) | | | (1,458) | |
Amounts reclassified from accumulated other comprehensive income (loss) | | 140 | | | (39) | | | (3,041) | | | (2,940) | | | 234 | | | 0 | | | (2,706) | |
Net current period other comprehensive (loss) income before tax | | 1,408 | | | 463 | | | (605) | | | 1,266 | | | 234 | | | (5,664) | | | (4,164) | |
Deferred taxes | | 324 | | | 107 | | | (137) | | | 294 | | | (13) | | | 0 | | | 281 | |
Net current period other comprehensive (loss) income after tax | | 1,084 | | | 356 | | | (468) | | | 972 | | | 247 | | | (5,664) | | | (4,445) | |
Balance at July 2, 2021 | | $ | 1,603 | | | $ | 186 | | | $ | 0 | | | $ | 1,789 | | | $ | (43,226) | | | $ | (1,647) | | | $ | (43,084) | |
| | | | | | | | | | | | | | |
Balance at December 31, 2019 | | $ | 1,324 | | | $ | (452) | | | $ | 25 | | | $ | 897 | | | $ | (41,346) | | | $ | (5,013) | | | $ | (45,462) | |
Other comprehensive (loss) income before reclassifications | | (343) | | | (1,234) | | | (352) | | | (1,929) | | | 0 | | | 293 | | | (1,636) | |
Amounts reclassified from accumulated other comprehensive income (loss) | | 7 | | | 809 | | | 453 | | | 1,269 | | | 46 | | | 0 | | | 1,315 | |
Net current period other comprehensive (loss) income before tax | | (336) | | | (425) | | | 101 | | | (660) | | | 46 | | | 293 | | | (321) | |
Deferred taxes | | (77) | | | (98) | | | 22 | | | (153) | | | (59) | | | 0 | | | (212) | |
Net current period other comprehensive (loss) income after tax | | (259) | | | (327) | | | 79 | | | (507) | | | 105 | | | 293 | | | (109) | |
Balance at June 26, 2020 | | $ | 1,065 | | | $ | (779) | | | $ | 104 | | | $ | 390 | | | $ | (41,241) | | | $ | (4,720) | | | $ | (45,571) | |
Reclassifications from accumulated other comprehensive income (loss) of gains and losses on foreign currency cash flow hedges are recorded in Other-netNet sales in the Consolidated Statements of Income.Income (Loss). Reclassifications from accumulated other comprehensive income (loss) of gains and losses on precious metal and copper cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note MO for additional details on cash flow hedges.
Reclassifications from accumulated other comprehensive income (loss) for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note IK for additional details on pension and post-employment expenses.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note KM — Stock-based Compensation Expense
Stock-based compensation expense, which includes awards settled in shares and in cash, was $1.5$2.2 million and $6.2$3.8 million in the thirdsecond quarter and first ninesix months of 2017,2021, respectively, compared to $2.1$3.1 million and $4.4$4.1 million, respectively, in the same periods of 2016.2020.
The Company granted 97,015 SARs52,709 stock appreciation rights (SARs) to certain employees during the first ninesix months of 2017.2021. 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, 2017July 2, 2021 were $35.26$68.82 and $10.89,$20.66, 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 | | 1.920.57 | % |
Dividend yield | | 1.10.7 | % |
Volatility | | 34.037.6 | % |
Expected term (in years) | | 5.6 | 4.6 |
The Company granted 62,18555,064 stock-settled restricted stock units (RSUs) and 32,466 cash-settled RSUs to certain employees and 9,904 to non-employee directors during the first ninesix months of 2017.2021. 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$68.44 and $75.77 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the ninesix months ended September 29, 2017. Cash-settledJuly 2, 2021. RSUs are accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stockgenerally expensed 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 2017.2021. The weighted-average fair value of the stock-settled PRSUs was $30.28$83.78 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 theits total return to shareholders over the vesting period relative to a peer group’s performance over the same period.
At September 29, 2017, unearnedJuly 2, 2021, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately $5.3$12.7 million, and is expected to be recognized over the remaining vesting period of the respective grants.
Note LN — 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.
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, 2017July 2, 2021 and December 31, 2016:2020:
| | | | | | | | | | | | | | | | |
(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) | (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 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Financial Assets | | | | | | | | | | | | | | | | | Financial Assets | | | | | | | | | | | | | | | | |
Deferred compensation investments | | $ | 2,149 |
| | $ | 1,734 |
| | $ | 2,149 |
| | $ | 1,734 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Deferred compensation investments | | $ | 3,881 | | | $ | 3,802 | | | $ | 3,881 | | | $ | 3,802 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Foreign currency forward contracts | | 149 |
| | 691 |
| | — |
| | — |
| | 149 |
| | 691 |
| | — |
| | — |
| Foreign currency forward contracts | | 477 | | | 107 | | | 0 | | | 0 | | | 477 | | | 107 | | | 0 | | | 0 | |
Precious metal swaps | | 45 |
| | — |
| | — |
| | — |
| | 45 |
| | — |
| | — |
| | — |
| Precious metal swaps | | 258 | | | 127 | | | 0 | | | 0 | | | 258 | | | 127 | | | 0 | | | 0 | |
Copper swaps | | Copper swaps | | 0 | | | 632 | | | 0 | | | 0 | | | 0 | | | 632 | | | 0 | | | 0 | |
Total | | $ | 2,343 |
| | $ | 2,425 |
| | $ | 2,149 |
| | $ | 1,734 |
| | $ | 194 |
| | $ | 691 |
|
| $ | — |
|
| $ | — |
| Total | | $ | 4,616 | | | $ | 4,668 | | | $ | 3,881 | | | $ | 3,802 | | | $ | 735 | | | $ | 866 | | | $ | 0 | | | $ | 0 | |
Financial Liabilities | | | | | | | | | | | | | | | | | Financial Liabilities | | | | | | | | | | | | | | | | |
Deferred compensation liability | | $ | 2,149 |
| | $ | 1,734 |
| | $ | 2,149 |
| | $ | 1,734 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| Deferred compensation liability | | $ | 3,881 | | | $ | 3,802 | | | $ | 3,881 | | | $ | 3,802 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
Foreign currency forward contracts | | 669 |
| | 1 |
| | — |
| | — |
| | 669 |
| | 1 |
| | — |
| | — |
| Foreign currency forward contracts | | 151 | | | 1,203 | | | 0 | | | 0 | | | 151 | | | 1,203 | | | 0 | | | 0 | |
Precious metal swaps | | 197 |
| | — |
| | — |
| | — |
| | 197 |
| | — |
| | — |
| | — |
| Precious metal swaps | | 17 | | | 349 | | | 0 | | | 0 | | | 17 | | | 349 | | | 0 | | | 0 | |
Copper swaps | | Copper swaps | | 0 | | | 27 | | | 0 | | | 0 | | | 0 | | | 27 | | | 0 | | | 0 | |
Total | | $ | 3,015 |
| | $ | 1,735 |
| | $ | 2,149 |
| | $ | 1,734 |
| | $ | 866 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| Total | | $ | 4,049 | | | $ | 5,381 | | | $ | 3,881 | | | $ | 3,802 | | | $ | 168 | | | $ | 1,579 | | | $ | 0 | | | $ | 0 | |
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, 2017July 2, 2021 and December 31, 2016.2020. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.
Note MO — 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, the 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
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.
The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and instruments to use to hedge that exposure within the confines of the policy.exposures. 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
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market 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. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine.
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. The Company also uses copper in its 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 the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period. To mitigate this impact, the Company hedges 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 untilto 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 sameor metal as the underlying exposure.
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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’sderivative'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.
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, 2017July 2, 2021 and December 31, 2016:2020:
| | | | September 29, 2017 | | December 31, 2016 | | | July 2, 2021 | | December 31, 2020 |
(Thousands) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | (Thousands) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Foreign currency forward contracts | | Foreign currency forward contracts | | | | | | | | |
Prepaid expenses | | Prepaid expenses | | $ | 62,324 | | | $ | 142 | | | $ | 62,012 | | | $ | 107 | |
Other liabilities and accrued items | | | | | | | | | Other liabilities and accrued items | | 12,427 | | | 75 | | | 7,695 | | | 55 | |
Foreign currency forward contracts - euro | | $ | 14,402 |
| | $ | (11 | ) | | $ | — |
| | $ | — |
| |
Total | | $ | 14,402 |
| | $ | (11 | ) | | $ | — |
| | $ | — |
| |
These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included $0.4 million of foreign currency losses relatingin the second quarter of 2021 and $1.2 million of foreign currency gains related to these derivatives in the first six months of $0.52021, compared to $1.7 million and $1.1$2.3 million duringof foreign currency gains in the thirdsecond quarter and first ninesix months of 2017,2020, respectively.
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 designated as cash flow hedges (on a gross basis) and balance sheet classification as of September 29, 2017July 2, 2021 and December 31, 2016:2020:
| | | | September 29, 2017 | | December 31, 2016 | | | July 2, 2021 | | December 31, 2020 |
(Thousands) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | (Thousands) | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
Prepaid expenses | | | | | | | | | Prepaid expenses | | | | | | | | |
Foreign currency forward contracts - yen | | $ | 2,000 |
| | $ | 59 |
| | $ | 2,418 |
| | $ | 239 |
| Foreign currency forward contracts - yen | | $ | 3,778 | | | $ | 107 | | | $ | 0 | | | $ | 0 | |
Foreign currency forward contracts - euro | | 6,829 |
| | 90 |
| | 6,493 |
| | 452 |
| Foreign currency forward contracts - euro | | 20,727 | | | 199 | | | 0 | | | 0 | |
Precious metal swaps | | 2,148 |
| | 13 |
| | — |
| | — |
| Precious metal swaps | | 4,538 | | | 258 | | | 2,155 | | | 127 | |
Copper swaps | | Copper swaps | | 0 | | | 0 | | | 6,225 | | | 632 | |
Total | | 10,977 |
| | 162 |
| | 8,911 |
| | 691 |
| Total | | 29,043 | | | 564 | | | 8,380 | | | 759 | |
| | | | | | | | | |
Other assets | | | | | | | | | Other assets | |
Precious metal swaps | | 1,932 |
| | 32 |
| | — |
| | — |
| |
Foreign currency forward contracts - yen | | Foreign currency forward contracts - yen | | 275 | | | 3 | | | 0 | | | 0 | |
Foreign currency forward contracts - euro | | Foreign currency forward contracts - euro | | 1,822 | | | 26 | | | 0 | | | 0 | |
Total | | 1,932 |
| | 32 |
| | — |
| | — |
| Total | | 2,097 | | | 29 | | | 0 | | | 0 | |
| | | | | | | | | |
Other liabilities and accrued items | | | | | | | | | Other liabilities and accrued items | |
Foreign currency forward contracts - yen | | Foreign currency forward contracts - yen | | 471 | | | 2 | | | 2,668 | | | 59 | |
Foreign currency forward contracts - euro | | 12,689 |
| | (658 | ) | | 537 |
| | (1 | ) | Foreign currency forward contracts - euro | | 5,900 | | | 61 | | | 17,611 | | | 1,089 | |
Precious metal swaps | | 7,845 |
| | (170 | ) | | — |
| | — |
| Precious metal swaps | | 518 | | | 17 | | | 4,964 | | | 349 | |
Copper swaps | | Copper swaps | | 0 | | | 0 | | | 2,445 | | | 27 | |
Total | | 20,534 |
| | (828 | ) | | 537 |
| | (1 | ) | Total | | 6,889 | | | 80 | | | 27,688 | | | 1,524 | |
| | | | | | | | | |
Other long-term liabilities | | | | | | | | | Other long-term liabilities | |
Precious metal swaps | | 1,999 |
| | (27 | ) | | — |
| | — |
| |
Foreign currency forward contracts - yen | | Foreign currency forward contracts - yen | | 271 | | | 0 | | | 0 | | | 0 | |
Foreign currency forward contracts - euro | | Foreign currency forward contracts - euro | | 2,383 | | | 13 | | | 0 | | | 0 | |
Total | | $ | 35,442 |
| | $ | (661 | ) | | $ | 9,448 |
| | $ | 690 |
| Total | | 2,654 | | | 13 | | | 0 | | | 0 | |
| Total | | Total | | $ | 40,683 | | | $ | 500 | | | $ | 36,068 | | | $ | 765 | |
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, 2017July 2, 2021 to the Consolidated Statements of Income within the next 18-month period.15-months. Refer to Note JL for additional OCI details.
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 2021 and 2020: | | | | | | | | | | | | | | | | | | | | |
| | | | Second Quarter Ended |
(Thousands) | | | | July 2, 2021 | | June 26, 2020 |
Hedging relationship | | Line item | | | | |
Foreign currency forward contracts | | Net sales | | $ | 0 | | | $ | 8 | |
Precious metal swaps | | Cost of sales | | 65 | | | 491 | |
Copper swaps | | Cost of sales | | (1,507) | | | 132 | |
Total | | | | $ | (1,442) | | | $ | 631 | |
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | | | Six Months Ended |
(Thousands) | | | | July 2, 2021 | | June 26, 2020 |
Hedging relationship | | Line item | | | | |
Foreign currency forward contracts | | Net sales | | $ | 140 | | | $ | 7 | |
Precious metal swaps | | Cost of sales | | (39) | | | 809 | |
Copper swaps | | Cost of sales | | (3,041) | | | 453 | |
Total | | | | $ | (2,940) | | | $ | 1,269 | |
Note NP — Contingencies
Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note QT ("Contingencies and Commitments") in the Company's 20162020 Annual Report on Form 10-K.
NaN beryllium cases were outstanding as of July 2, 2021. The Company does not expect the resolution of these matters to have a material impact on the consolidated financial statements.
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
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.
On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. The case is currently in the preliminary stages. The Company believes that it has substantive defenses and intends to vigorously defend this suit.
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$5.2 million and $5.5 millionat September 29, 2017July 2, 2021 and $6.0 million at December 31, 2016.2020, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.
Note Q — Debt
| | | | | | | | | | | | | | |
(Thousands) | | July 2, 2021 | | December 31, 2020 |
Borrowings under Credit Agreement | | $ | 56,500 | | | $ | 34,000 | |
Foreign debt | | 2,773 | | | 3,157 | |
Fixed rate industrial development revenue bonds | | 0 | | | 1,322 | |
Total debt outstanding | | 59,273 | | | 38,479 | |
Current portion of long-term debt | | (435) | | | (1,937) | |
Long-term debt | | $ | 58,838 | | | $ | 36,542 | |
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
As of July 2, 2021 and December 31, 2020, the Company had $56.5 million and $34.0 million, respectively, outstanding against its revolving credit facility with average interest rates of 1.46% and 1.65% at July 2, 2021 and December 31, 2020, respectively. The remaining borrowing capacity under the revolving credit facility as of July 2, 2021 and December 31, 2020 was $273.0 million and $245.8 million, respectively.The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2024. The Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all of its debt covenants as of July 2, 2021.
At July 2, 2021 and December 31, 2020, there was $47.3 million and $48.1 million outstanding against the letters of credit sub-facility, respectively.
|
| | | | |
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, energy, and telecom and data center.
Coronavirus (COVID-19) Second Quarter 2021 Update
The significant macroeconomic impact of the ongoing COVID-19 pandemic impacted several of our end markets throughout 2020 primarily in the first half of the year in the form of reduced demand, particularly in the consumer electronics, automotive, energy, aerospace and defense, and industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services,end markets. During the first six months of 2021, we continued to see improvements in demand as global government-imposed restrictions continued to be lifted and appliance.many country vaccination programs gained further momentum. However, the world continues to be impacted by the COVID-19 pandemic and the impact on our operations and the markets we serve is fluid and will depend largely on future developments, including the availability and effectiveness of vaccines globally, new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or mitigate its economic, public health, and other impacts. These developments are constantly evolving and cannot be accurately predicted. We continue to invest in the business, people, and strategies necessary to achieve our long-term priorities as we focus on driving profitable growth. We have continued to operate during the course of the COVID-19 pandemic in all our production facilities, having taken the recommended public health measures to ensure worker and workplace safety.
RESULTS OF OPERATIONS
Third
Second Quarter
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | |
| | July 2, | | June 26, | | $ | | % | | | | | | | | |
(Thousands, except per share data) | | 2021 | | 2020 | | Change | | Change | | | | | | | | |
Net sales | | $ | 370,999 | | | $ | 271,468 | | | $ | 99,531 | | | 37 | % | | | | | | | | |
Value-added sales | | 207,887 | | | 159,068 | | | 48,819 | | | 31 | % | | | | | | | | |
Gross margin | | 69,581 | | | 46,955 | | | 22,626 | | | 48 | % | | | | | | | | |
Gross margin as a % of value-added sales | | 33 | % | | 30 | % | | | | | | | | | | | | |
Selling, general, and administrative (SG&A) expense | | 38,060 | | | 32,852 | | | 5,208 | | | 16 | % | | | | | | | | |
SG&A expense as a % of value-added sales | | 18 | % | | 21 | % | | | | | | | | | | | | |
Research and development (R&D) expense | | 6,604 | | | 4,502 | | | 2,102 | | | 47 | % | | | | | | | | |
R&D expense as a % of value-added sales | | 3 | % | | 3 | % | | | | | | | | | | | | |
Restructuring expense | | — | | | 2,387 | | | (2,387) | | | (100) | % | | | | | | | | |
Other—net | | 4,194 | | | (357) | | | 4,551 | | | (1,275) | % | | | | | | | | |
Operating profit | | 20,723 | | | 7,571 | | | 13,152 | | | 174 | % | | | | | | | | |
Other non-operating (income)—net | | (1,277) | | | (851) | | | (426) | | | 50 | % | | | | | | | | |
Interest expense—net | | 858 | | | 1,259 | | | (401) | | | (32) | % | | | | | | | | |
Income before income taxes | | 21,142 | | | 7,163 | | | 13,979 | | | 195 | % | | | | | | | | |
Income tax expense | | 3,274 | | | 1,360 | | | 1,914 | | | 141 | % | | | | | | | | |
Net income | | $ | 17,868 | | | $ | 5,803 | | | $ | 12,065 | | | 208 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 0.87 | | | $ | 0.28 | | | $ | 0.59 | | | 211 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Third Quarter Ended |
| | Sept. 29, | | Sept. 30, | | $ | | % |
(Thousands, except per share data) | | 2017 | | 2016 | | Change | | Change |
Net sales | | $ | 294,268 |
| | $ | 249,619 |
| | $ | 44,649 |
| | 18 | % |
Value-added sales | | 171,382 |
| | 157,001 |
| | 14,381 |
| | 9 | % |
Gross margin | | 55,203 |
| | 50,755 |
| | 4,448 |
| | 9 | % |
Gross margin as a % of value-added sales | | 32 | % | | 32 | % | | N/A |
| | N/A |
|
Selling, general, and administrative (SG&A) expense
| | 36,415 |
| | 34,177 |
| | 2,238 |
| | 7 | % |
SG&A expense as a % of value-added sales | | 21 | % | | 22 | % | | N/A |
| | N/A |
|
Research and development (R&D) expense | | 3,429 |
| | 3,237 |
| | 192 |
| | 6 | % |
R&D expense as a % of value-added sales | | 2 | % | | 2 | % | | N/A |
| | N/A |
|
Other—net | | 3,801 |
| | 3,190 |
| | 611 |
| | 19 | % |
Operating profit | | 11,558 |
|
| 10,151 |
| | 1,407 |
| | 14 | % |
Interest expense—net | | 533 |
| | 490 |
| | 43 |
| | 9 | % |
Income before income taxes | | 11,025 |
| | 9,661 |
| | 1,364 |
| | 14 | % |
Income tax expense | | 1,705 |
| | 1,616 |
| | 89 |
| | 6 | % |
Net income | | $ | 9,320 |
| | $ | 8,045 |
| | $ | 1,275 |
| | 16 | % |
| | | | | | | | |
Diluted earnings per share | | $ | 0.46 |
| | $ | 0.40 |
| | $ | 0.06 |
| | 15 | % |
N/A = Not Applicable
Net sales of $294.3$371.0 million in the thirdsecond quarter of 2017 were $44.72021 increased $99.5 million higher than the $249.6from $271.5 million recorded in the thirdsecond quarter of 2016.2020. Net sales increased in all of $38.6 millionour segments primarily due to increased volumes, as well as due to sales attributable to our Optics Balzers acquisition, which was completed during the third quarter of 2017 were attributable to the high performance target materials business of the Heraeus Group (HTB). Changes2020. The change in precious metal and copper prices negativelyfavorably impacted net sales induring the thirdsecond quarter of 20172021 by approximately $2.4 million when compared to the third quarter of 2016.$19.8 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$207.9 million in the thirdsecond quarter of 20172021 increased $14.4$48.8 million, or 9%31%, compared to the thirdsecond quarter of 2016. Value-added2020. The increase is primarily driven by increased value-added sales into the semiconductor, industrial, and automotive end markets, as well as value-added sales from the HTB acquisition totaled $11.4 million our Optics Balzers acquisition.
Gross margin in the thirdsecond quarter of 2017. Value-added sales2021 was $69.6 million, which was up 48% compared to the consumer electronics end market, which accounted for 31% of our total value-added sales during 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 2017 was $55.2 million, or $4.4 million higher than the $50.8 million gross margin recorded during the third quarter of 2016.2020. Gross margin expressed as a percentage of value-added sales was 32%increased to 33% in the thirdsecond quarter of both 2017 and 2016.2021 from 30% in the second quarter of 2020. The increase was primarily driven by increased sales volumes in the second quarter of 2021.
SG&A expense was $36.4$38.1 million in the thirdsecond quarter of 2017, or $2.22021, compared to $32.9 million higher than the $34.2 million recorded in the thirdsecond quarter of 2016.2020. The increase isin SG&A expense for the second quarter of 2021 was primarily driven by increased variable compensation expense, as well as costs attributable to $2.1 millionour Optics Balzers acquisition. Expressed as a percentage of HTB expenses.value-added sales, SG&A expense was 18% and 21% in the second quarter of 2021 and 2020, respectively.
R&D expense consists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and applications.applications to deliver new high performing advanced materials to our customers. R&D expense was flat as a percentageaccounted for 3% of value-added sales at approximately 2% in the thirdsecond quarter of both 20172021 and 2016.2020.
Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure.
In the second quarter of 2020, we recorded $2.4 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note F to the Consolidated Financial Statements for additional discussion.
Other-net was $3.8$4.2 million of expense in the thirdsecond quarter of 2017,2021, or a $0.6$4.6 million increase from the thirdsecond quarter of 2016. Other-net2020, which was primarily driven by $2.5 million of decreased foreign exchange gains, primarily related to a $2.2 million foreign exchange hedge gain realized in the thirdsecond quarter of 2017 included higher metal consignment fees2020, and $0.9 million of $0.8 million, as comparedincreased intangible asset amortization expense, both related to the third quarteracquisition of 2016.Optics Balzers. Refer to Note DE to the Consolidated Financial Statements for details of the major components within Other-net.
Other non-operating (income)-net includes components of pension and post-retirement expense other than service costs. Refer to Note K to the Consolidated Financial Statements for details of the components.
Interest expense-net was $0.5$0.9 million and $1.3 million in the thirdsecond quarter of both 20172021 and 2016.2020, respectively. The decrease in interest expense is primarily due to reduced borrowings under our revolving credit facility in the second quarter of 2021, compared to the second quarter of 2020.
Income tax expensefor the thirdsecond quarter of 20172021 was $1.7$3.3 million, compared to $1.6$1.4 million in the thirdsecond quarter of 2016.2020. The effective tax rate for the thirdsecond quarter of 20172021 and 2020 was 15.5% comparedand 19.0%, respectively. The effective tax rate for the second quarter of both 2021 and 2020 was lower than the statutory tax rate primarily due to 16.7% in the prior-year period. The effectsimpact of percentage depletion, the foreign rate differential, the research and development credit, discrete benefits,credits, and other items were the primary factorsforeign derived intangible income deduction. See Note G to the Consolidated Financial Statements for additional discussion.
Six Months
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | |
| | July 2, | | June 26, | | $ | | % | | | | | | | | |
(Thousands, except per share data) | | 2021 | | 2020 | | Change | | Change | | | | | | | | |
Net sales | | $ | 725,385 | | | $ | 549,414 | | | $ | 175,971 | | | 32 | % | | | | | | | | |
Value-added sales | | 406,469 | | | 313,039 | | | 93,430 | | | 30 | % | | | | | | | | |
Gross margin | | 136,377 | | | 91,525 | | | 44,852 | | | 49 | % | | | | | | | | |
Gross margin as a % of value-added sales | | 34 | % | | 29 | % | | | | | | | | | | | | |
SG&A expense | | 74,836 | | | 63,596 | | | 11,240 | | | 18 | % | | | | | | | | |
SG&A expense as a % of value-added sales | | 18 | % | | 20 | % | | | | | | | | | | | | |
R&D expense | | 12,810 | | | 8,687 | | | 4,123 | | | 47 | % | | | | | | | | |
R&D expense as a % of value-added sales | | 3 | % | | 3 | % | | | | | | | | | | | | |
Impairment charges | | — | | | 10,766 | | | (10,766) | | | (100) | % | | | | | | | | |
Restructuring (income) expense | | (378) | | | 4,551 | | | (4,929) | | | (108) | % | | | | | | | | |
Other—net | | 8,668 | | | 1,922 | | | 6,746 | | | 351 | % | | | | | | | | |
Operating profit | | 40,441 | | | 2,003 | | | 38,438 | | | 1,919 | % | | | | | | | | |
Other non-operating (income)—net | | (2,553) | | | (1,795) | | | (758) | | | 42 | % | | | | | | | | |
Interest expense—net | | 1,619 | | | 1,505 | | | 114 | | | 8 | % | | | | | | | | |
Income before income taxes | | 41,375 | | | 2,293 | | | 39,082 | | | 1,704 | % | | | | | | | | |
Income tax expense | | 6,740 | | | 368 | | | 6,372 | | | 1,732 | % | | | | | | | | |
Net income | | $ | 34,635 | | | $ | 1,925 | | | $ | 32,710 | | | 1,699 | % | | | | | | | | |
| | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 1.68 | | | $ | 0.09 | | | $ | 1.59 | | | 1,767 | % | | | | | | | | |
Net sales of $725.4 million in the difference betweenfirst six months of 2021 increased $176.0 million from $549.4 million in the effective and statutory ratesfirst six months of 2020. Net sales increased in all of our segments primarily due to increased volumes, as well as due to sales attributable to our Optics Balzers acquisition, which was completed during the third quarter of 20172020. The change in precious metal and 2016.copper prices favorably impacted net sales during the first six months of 2021 by $37.6 million.
Value-added sales of $406.5 million in the first six months of 2021 increased $93.0 million, or 30%, compared to the first six months of 2020. The increase is primarily driven by increased value-added sales into the semiconductor, automotive, aerospace and defense, and industrial end markets, as well as value-added sales from our Optics Balzers acquisition.
Gross margin in the first half of 2021 was $136.4 million, which was up 49% compared to the first half of 2020. Gross margin expressed as a percentage of value-added sales increased to 34% in the first six months of 2021 from 29% in the first six months of 2020. The increase was primarily driven by increased sales volumes in the first half of 2021.
SG&A expense was $74.8 million in the first six months of 2021, compared to $63.6 million in the first six months of 2020. The increase in SG&A expense for the first half of 2021 was primarily driven by increased variable compensation expense, as well as costs attributable to our Optics Balzers acquisition. Expressed as a percentage of value-added sales, SG&A expense was 18% and 20% in the first half of 2021 and 2020, respectively.
R&D expense consists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and applications to deliver new high performing advanced materials to our customers. R&D expense accounted for 3% of value-added sales in the first half of both 2021 and 2020.
Impairment charges include non-recurring charges relating to goodwill and other assets recorded in the first six months of 2020 in our Precision Optics segment.
Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. During the first quarter of 2021, we substantially completed the closure of our LAC business.
In the first half of 2020, we recorded $4.6 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note F to the Consolidated Financial Statements for further details on income taxes.additional discussion.
Nine Months
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | Sept. 29, | | Sept. 30, | | $ | | % |
(Thousands, except per share data) | | 2017 | | 2016 | | Change | | Change |
Net sales | | $ | 830,779 |
| | $ | 734,906 |
| | $ | 95,873 |
| | 13 | % |
Value-added sales | | 496,462 |
| | 454,793 |
| | 41,669 |
| | 9 | % |
Gross margin | | 152,756 |
| | 139,418 |
| | 13,338 |
| | 10 | % |
Gross margin as a % of value-added sales | | 31 | % | | 31 | % | | N/A |
| | N/A |
|
SG&A expense
| | 108,118 |
| | 97,101 |
| | 11,017 |
| | 11 | % |
SG&A expense as a % of value-added sales | | 22 | % | | 21 | % | | N/A |
| | N/A |
|
R&D expense | | 10,103 |
| | 9,860 |
| | 243 |
| | 2 | % |
R&D expense as a % of value-added sales | | 2 | % | | 2 | % | | N/A |
| | N/A |
|
Other—net | | 9,823 |
| | 8,997 |
| | 826 |
| | 9 | % |
Operating profit | | 24,712 |
| | 23,460 |
| | 1,252 |
| | 5 | % |
Interest expense—net | | 1,721 |
| | 1,417 |
| | 304 |
| | 21 | % |
Income before income taxes | | 22,991 |
| | 22,043 |
| | 948 |
| | 4 | % |
Income tax expense | | 3,308 |
| | 3,081 |
| | 227 |
| | 7 | % |
Net income | | $ | 19,683 |
| | $ | 18,962 |
| | $ | 721 |
| | 4 | % |
| | | | | | | | |
Diluted earnings per share | | $ | 0.97 |
| | $ | 0.94 |
| | $ | 0.03 |
| | 3 | % |
N/A = Not Applicable
Net sales of $830.8 million in the first nine months of 2017 were $95.9 million higher than the $734.9 million recorded in the first nine months of 2016. Changes in precious metal and copper prices favorably impacted net sales in the first nine months of 2017 by approximately $6.0 million when compared to the first nine months of 2016. Net sales in the Performance Alloys 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 electronics 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 in the first nine months of 2017 increased $41.7 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 Other-net was $152.8 million, or $13.4 million higher than the $139.4 million gross margin recorded during the first nine months of 2016. Gross margin was 31% of value-added sales in the first nine months of both 2017 and 2016.
SG&A expense was $108.1 million in the first nine months of 2017, or $11.0 million higher than the $97.1 million recorded in the first nine months of 2016. The increase related to higher incentive compensation and stock-based compensation expense of $8.1 million, which included $1.4 million due to accelerated stock compensation expense associated with the transition of the Company's CEO. Additionally, the increase is attributable to HTB expenses of $4.2 million.
R&D expense was flat as a percentage of value-added sales at approximately 2% in the first nine months of both 2017 and 2016.
Other-net was $9.8 million and $9.0$8.7 million of expense in the first ninesix months of 2017 and 2016, respectively. Other-net2021, or a $6.7 million increase from the first six months of 2020, which was primarily driven by $2.5 million of foreign exchange gains realized during the first six months of 2020 compared to $1.2 million of foreign exchange losses realized in the first ninesix months of 2017 included higher metal consignment fees2021, as well as $1.9 million of $1.3 million, as comparedincreased intangible asset amortization expense, both of which were primarily related to the first nine monthsacquisition of 2016.Optics Balzers in third quarter of 2020. Refer to Note DE to the Consolidated Financial Statements for details of the major components within Other-net.
Other non-operating (income)-net includes components of pension and post-retirement expense other than service costs. Refer to Note K to the Consolidated Financial Statements for details of the components.
Interest expense-net was $1.7$1.6 million and $1.5 million in the first ninesix months of 2017, or a $0.32021 and 2020, respectively.
Income tax expensefor the first half of 2021 was $6.7 million, increase from $1.4compared to $0.4 million in the first nine monthshalf of 2016 due to higher average debt outstanding.
Income tax expensefor the first nine months of 2017 was $3.3 million, compared to $3.1 million in the first nine months of 2016.2020. The effective tax rate for the first nine monthshalf of 20172021 and 2020 was 14.4% compared to an16.3% and 16.0%, respectively. The effective tax rate for the first six months of 14.0% inboth 2021 and 2020 was lower than the prior-year period. The effectsstatutory tax rate primarily due to the impact of percentage depletion the foreign rate differential, theand research and development credit, discrete benefits, and other items were the primary factorscredits. The effective tax rate for the difference between thefirst six months of 2021 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based compensation awards. The effective and statutory rates intax rate for the first ninesix months of 2017 and 2016. Refer2020 included a net discrete income tax expense of $0.8 million, primarily related to an impairment of goodwill. See Note FG to the Consolidated Financial Statements for further details on income taxes.additional discussion.
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 20172021 and 20162020 is as follows:
|
| | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
| | Sept. 29, |
| Sept. 30, | | Sept. 29, | | Sept. 30, |
(Thousands) | | 2017 |
| 2016 | | 2017 | | 2016 |
Net sales | | | | | | | | |
Performance Alloys and Composites | | $ | 109,393 |
| | $ | 103,699 |
| | $ | 310,487 |
| | $ | 292,024 |
|
Advanced Materials | | 157,770 |
| | 107,250 |
| | 429,550 |
| | 328,927 |
|
Precision Coatings | | 27,105 |
| | 38,670 |
| | 90,742 |
| | 113,955 |
|
Other | | — |
| | — |
| | — |
| | — |
|
Total | | $ | 294,268 |
| | $ | 249,619 |
| | $ | 830,779 |
| | $ | 734,906 |
|
| | | | | | | | |
Less: pass-through metal costs | | | | | | | | |
Performance Alloys and Composites | | $ | 18,756 |
| | $ | 16,452 |
| | $ | 47,953 |
| | $ | 43,225 |
|
Advanced Materials | | 97,379 |
| | 61,290 |
| | 259,830 |
| | 193,908 |
|
Precision Coatings | | 5,209 |
| | 12,867 |
| | 22,932 |
| | 38,407 |
|
Other | | 1,542 |
| | 2,009 |
| | 3,602 |
| | 4,573 |
|
Total | | $ | 122,886 |
| | $ | 92,618 |
| | $ | 334,317 |
| | $ | 280,113 |
|
| | | | | | | | |
Value-added sales | | | | | | | | |
Performance Alloys and Composites | | $ | 90,637 |
| | $ | 87,247 |
| | $ | 262,534 |
| | $ | 248,799 |
|
Advanced Materials | | 60,391 |
| | 45,960 |
| | 169,720 |
| | 135,019 |
|
Precision Coatings | | 21,896 |
| | 25,803 |
| | 67,810 |
| | 75,548 |
|
Other | | (1,542 | ) | | (2,009 | ) | | (3,602 | ) | | (4,573 | ) |
Total | | $ | 171,382 |
| | $ | 157,001 |
| | $ | 496,462 |
| | $ | 454,793 |
|
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. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
| | July 2, | | June 26, | | July 2, | | June 26, |
(Thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Net sales | | | | | | | | |
Performance Alloys and Composites | | $ | 125,294 | | | $ | 101,614 | | | $ | 239,437 | | | $ | 200,681 | |
Advanced Materials | | 213,114 | | | 150,108 | | | 417,758 | | | 310,273 | |
Precision Optics | | 32,591 | | | 19,746 | | | 68,190 | | | 38,460 | |
Other | | — | | | — | | | — | | | — | |
Total | | $ | 370,999 | | | $ | 271,468 | | | $ | 725,385 | | | $ | 549,414 | |
| | | | | | | | |
Less: pass-through metal costs | | | | | | | | |
Performance Alloys and Composites | | $ | 16,696 | | | $ | 11,858 | | | $ | 30,007 | | | $ | 27,210 | |
Advanced Materials | | 146,214 | | | 97,944 | | | 287,909 | | | 203,616 | |
Precision Optics | | 9 | | | 1,968 | | | 43 | | | 3,693 | |
Other | | 193 | | | 630 | | | 957 | | | 1,856 | |
Total | | $ | 163,112 | | | $ | 112,400 | | | $ | 318,916 | | | $ | 236,375 | |
| | | | | | | | |
Value-added sales | | | | | | | | |
Performance Alloys and Composites | | $ | 108,598 | | | $ | 89,756 | | | $ | 209,430 | | | $ | 173,471 | |
Advanced Materials | | 66,900 | | | 52,164 | | | 129,849 | | | 106,657 | |
Precision Optics | | 32,582 | | | 17,778 | | | 68,147 | | | 34,767 | |
Other | | (193) | | | (630) | | | (957) | | | (1,856) | |
Total | | $ | 207,887 | | | $ | 159,068 | | | $ | 406,469 | | | $ | 313,039 | |
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.
The cost of gold, silver, platinum, palladium, copper, ruthenium, iridium, rhodium, rhenium, and osmium 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. During the first quarter of 2021, we added ruthenium, iridium, rhodium, rhenium, and osmium to our definition of value-added sales as the costs of these materials are treated as pass-through and the business use and price volatility of these materials has increased in recent periods. Prior period value-added sales amounts have been recast to reflect this change.
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.
Segment Results
The Company consists of four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings,Optics, 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, | | $ | | % | | July 2, | | June 26, | | $ | | % | |
(Thousands) | | 2017 | | 2016 | | Change | | Change | (Thousands) | | 2021 | | 2020 | | Change | | Change | |
Net sales | | $ | 109,393 |
| | $ | 103,699 |
| | $ | 5,694 |
| | 5 | % | Net sales | | $ | 125,294 | | | $ | 101,614 | | | $ | 23,680 | | | 23 | % | |
Value-added sales | | 90,637 |
| | 87,247 |
| | 3,390 |
| | 4 | % | Value-added sales | | 108,598 | | | 89,756 | | | 18,842 | | | 21 | % | |
Operating profit | | 6,786 |
| | 4,357 |
| | 2,429 |
| | 56 | % | Operating profit | | 17,314 | | | 6,824 | | | 10,490 | | | 154 | % | |