PART I1 - FINANCIAL INFORMATION

~~MATERION CORPORATION AND SUBSIDIARIES~~



~~Item 1.~~	Item 1. Financial Statements

~~The consolidated financial statements of Materion Corporation and its subsidiaries for the third quarter and nine months ended September 29, 2017 are as follows:~~



	~~Consolidated Statements of Income -~~	2
	~~Third quarter and nine months ended September 29, 2017 and September 30, 2016~~

	~~Consolidated Statements of Comprehensive Income -~~	3
	~~Third quarter and nine months ended September 29, 2017 and September 30, 2016~~

	~~Consolidated Balance Sheets -~~	4
	~~September 29, 2017 and December 31, 2016~~

	~~Consolidated Statements of Cash Flows -~~	5
	~~Nine months ended September 29, 2017 and September 30, 2016~~

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Second Quarter Ended				Six Months Ended
(Thousands, except per share amounts)	July 2, 2021		June 26, 2020*		July 2, 2021		June 26, 2020*
Net sales	$	370,999	$	271,468	$	725,385	$	549,414
Cost of sales	301,418		224,513		589,008		457,889
Gross margin	69,581		46,955		136,377		91,525
Selling, general, and administrative expense	38,060		32,852		74,836		63,596
Research and development expense	6,604		4,502		12,810		8,687
Goodwill impairment charges	0		0		0		9,053
Asset impairment charges	0		0		0		1,713
Restructuring expense (income)	0		2,387		(378)		4,551
Other—net	4,194		(357)		8,668		1,922
Operating profit	20,723		7,571		40,441		2,003
Other non-operating income—net	(1,277)		(851)		(2,553)		(1,795)
Interest expense—net	858		1,259		1,619		1,505
Income before income taxes	21,142		7,163		41,375		2,293
Income tax expense	3,274		1,360		6,740		368
Net income	$	17,868	$	5,803	$	34,635	$	1,925
Basic earnings per share:
Net income per share of common stock	$	0.87	$	0.29	$	1.70	$	0.09
Diluted earnings per share:
Net income per share of common stock	$	0.87	$	0.28	$	1.68	$	0.09
Weighted-average number of shares of common stock outstanding:
Basic	20,429		20,317		20,402		20,350
Diluted	20,651		20,554		20,647		20,587

Third Quarter Ended Nine Months Ended
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(Thousands, except per share amounts) 2017 2016 2017 2016
Net sales $ 294,268
$ 249,619
$ 830,779
$ 734,906
Cost of sales 239,065
198,864
678,023
595,488
Gross margin 55,203
50,755
152,756
139,418
Selling, general, and administrative expense 36,415
34,177
108,118
97,101
Research and development expense 3,429
3,237
10,103
9,860
Other—net 3,801
3,190
9,823
8,997
Operating profit 11,558
10,151
24,712
23,460
Interest expense—net 533
490
1,721
1,417
Income before income taxes 11,025
9,661
22,991
22,043
Income tax expense 1,705
1,616
3,308
3,081
Net income $ 9,320
$ 8,045
$ 19,683
$ 18,962
Basic earnings per share:
Net income per share of common stock $ 0.47
$ 0.40
$ 0.98
$ 0.95
Diluted earnings per share:
Net income per share of common stock $ 0.46
$ 0.40
$ 0.97
$ 0.94
Cash dividends per share $ 0.100
$ 0.095
$ 0.295
$ 0.280
Weighted-average number of shares of common stock outstanding:
Basic 20,040
19,957
20,007
19,996
Diluted 20,411
20,192
20,361
20,209
*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.

~~The accompanying~~See notes ~~are an integral part of the~~to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


	Second Quarter Ended				Six Months Ended
	July 2,		June 26,		July 2,		June 26,
(Thousands)	2021		2020*		2021		2020*
Net income	$	17,868	$	5,803	$	34,635	$	1,925
Other comprehensive income (loss):
Foreign currency translation adjustment	3,193		1,166		(5,664)		293
Derivative and hedging activity, net of tax	(273)		347		972		(507)
Pension and post-employment benefit adjustment, net of tax	83		89		247		105
Other comprehensive income (loss)	3,003		1,602		(4,445)		(109)
Comprehensive income	$	20,871	$	7,405	$	30,190	$	1,816

Third Quarter Ended Nine Months Ended
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
(Thousands) 2017 2016 2017 2016
Net income $ 9,320
$ 8,045
$ 19,683
$ 18,962
Other comprehensive income (loss):
Foreign currency translation adjustment 271
467
1,649
2,918
Derivative and hedging activity, net of tax (120 ) 132
(755 ) (489 )
Pension and post-employment benefit adjustment, net of tax 881
673
2,397
2,923
Other comprehensive income 1,032
1,272
3,291
5,352
Comprehensive income $ 10,352
$ 9,317
$ 22,974
$ 24,314
*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.

~~The accompanying~~See notes ~~are an integral part of the~~to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)


	July 2,		Dec. 31,
(Thousands)	2021		2020
Assets
Current assets
Cash and cash equivalents	$	24,345	$	25,878
Accounts receivable, net	179,326		166,447
Inventories, net	290,739		250,778
Prepaid and other current assets	22,155		20,896
Total current assets	516,565		463,999
Deferred income taxes	1,909		3,134
Property, plant, and equipment	1,052,464		998,312
Less allowances for depreciation, depletion, and amortization	(702,903)		(688,626)
Property, plant, and equipment, net	349,561		309,686
Operating lease, right-of-use assets	58,833		62,089
Intangible assets, net	50,851		54,672
Other assets	21,724		19,364
Goodwill	142,054		144,916
Total Assets	$	1,141,497	$	1,057,860
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt	$	435	$	1,937
Accounts payable	80,600		55,640
Salaries and wages	27,505		18,809
Other liabilities and accrued items	36,930		40,887
Income taxes	4,837		1,898
Unearned revenue	10,920		7,713
Total current liabilities	161,227		126,884
Other long-term liabilities	17,477		17,002
Operating lease liabilities	53,736		56,761
Finance lease liabilities	18,410		20,539
Retirement and post-employment benefits	40,001		41,877
Unearned income	95,290		86,761
Deferred income taxes	14,817		15,864
Long-term debt	58,838		36,542
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)	0		0
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both July 2nd and December 31st)	268,205		258,642
Retained earnings	660,851		631,058
Common stock in treasury	(208,854)		(199,187)
Accumulated other comprehensive loss	(43,084)		(38,639)
Other equity	4,583		3,756
Total shareholders' equity	681,701		655,630
Total Liabilities and Shareholders’ Equity	$	1,141,497	$	1,057,860

(Unaudited)
Sept. 29, Dec. 31,
(Thousands) 2017 2016
Assets
Current assets
Cash and cash equivalents $ 22,486
$ 31,464
Accounts receivable 125,417
100,817
Inventories 220,223
200,865
Prepaid and other current assets 19,115
12,138
Total current assets 387,241
345,284
Long-term deferred income taxes 40,332
39,409
Property, plant, and equipment 877,002
861,267
Less allowances for depreciation, depletion, and amortization (632,435 ) (608,636 )
Property, plant, and equipment—net 244,567
252,631
Intangible assets 10,771
11,074
Other assets 6,312
5,950
Goodwill 89,720
86,950
Total Assets $ 778,943
$ 741,298
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt $ 767
$ 733
Accounts payable 44,678
32,533
Salaries and wages 30,889
29,885
Other liabilities and accrued items 27,950
21,340
Income taxes 2,953
4,781
Unearned revenue 5,859
1,105
Total current liabilities 113,096
90,377
Other long-term liabilities 18,968
17,979
Retirement and post-employment benefits 92,014
91,505
Unearned income 37,991
41,369
Long-term income taxes 1,593
2,100
Deferred income taxes 279
274
Long-term debt 3,010
3,605
Shareholders’ equity
Serial preferred stock —
—
Common stock 219,817
212,702
Retained earnings 531,683
517,903
Common stock in treasury (161,030 ) (154,399 )
Accumulated other comprehensive loss (82,890 ) (86,181 )
Other equity transactions 4,412
4,064
Total shareholders' equity 511,992
494,089
Total Liabilities and Shareholders’ Equity $ 778,943
$ 741,298

~~The accompanying~~

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

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	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 the~~to 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, the~~The accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature. Certain amounts in prior ~~years~~periods have been reclassified to conform to the ~~2017~~2021 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 ~~2016~~2020 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.

Business Combinations:The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

The amounts reflected in Note B to the Consolidated Financial Statements are the results of ~~the~~a 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,~~ ~~Improvements~~fourth quarter of 2020, the Company elected to ~~Employee Share-Based Payment Accounting~~change 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 aspects~~it provides better matching of ~~accounting for share-based payment transactions, including income tax consequences, classification~~revenues 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 tax~~Company’s inventory. The effects of ~~exercised or vested awards will be treated as discrete~~the 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 regardless~~Company’s consolidated balance sheet as of ~~whether~~June 26, 2020 and the ~~benefit reduces taxes payable in the reporting period. Excess tax benefits will be classified, along with other~~consolidated statements of income, ~~tax~~comprehensive 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 ~~nine~~three and six months ended ~~September 30, 2016, cash flows from operating activities increased by $868 with a corresponding decrease~~June 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 retrospectively~~in 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 ~~presentation~~annual 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 cost~~the 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 cost~~interbank 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 impact~~assessing 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 guidance~~various contracts will require ~~lessees to report their operating leases as both~~ an ~~asset~~update for a new reference rate, and ~~liability on~~will 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 effective~~timing 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 process~~completion 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 — ~~Acquisitions~~Acquisition

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 business~~and 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 facilities~~acquisition is being reported in ~~Germany, Taiwan, and the United States. This business operates within the Advanced Materials~~our Precision Optics segment and the results of ~~operations~~Optics Balzers are ~~included as of the date of acquisition.~~

~~Materion Corporation and Subsidiaries~~

~~Notes~~not material to our Consolidated Financial ~~Statements~~

~~(Unaudited)~~

~~The Company will make~~Statements. 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 million~~completes 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 ~~operating~~reportable segments: Performance Alloys and Composites, Advanced Materials, Precision ~~Coatings,~~Optics, and Other. The Company’s ~~operating~~reportable 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 ~~Coatings~~Optics 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-net~~Revenue 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 months~~practical 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

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 the~~in 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 $0.5~~totaled $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.

1014

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 ~~219,292~~52,709 and ~~982,588~~191,500 for the quarters ended ~~September 29, 2017~~July 2, 2021 and ~~September 30, 2016,~~June 26, 2020, respectively and ~~370,917~~64,478 and ~~993,418~~230,893 for the ~~nine~~six months ended ~~September 29, 2017~~July 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 ~~their~~the 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 ~~liquidation~~Company maintains the majority of ~~last~~the precious metals and copper used in ~~first~~production 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 ~~sales~~work 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 ~~third~~amount 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 the~~and first ~~nine~~six 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 ~~third~~second quarter and first ~~nine~~six months of ~~2017~~2021 and ~~2016~~2020 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)

1116

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 ~~made~~did not make any contributions to ~~the~~its domestic defined benefit ~~pension~~ plan ~~of $8.0 million and $12.0 million~~ in the second quarter or first ~~nine~~six months of ~~2017 and 2016, respectively.~~2021 or 2020.

~~Beginning in 2017, the~~The Company ~~has elected to use a spot-rate approach to estimate~~reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and ~~interest~~the non-service cost components of net periodic benefit cost ~~for its~~in 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 rates~~Company froze the pay and service amounts used to calculate pension benefits for ~~each projected benefit payment~~active participants in the ~~calculation. Historically, the Company used a weighted-average approach~~pension 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

(Unaudited)

Note JL — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the ~~third~~second quarter and first ~~nine~~six months of ~~2017~~2021 and ~~2016~~2020 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)

1218

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-net~~Net 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.

1419

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 ~~third~~second quarter and first ~~nine~~six 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 SARs~~52,709 stock appreciation rights (SARs) to certain employees during the first ~~nine~~six months of ~~2017.~~2021. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ~~nine~~six months ended ~~September 29, 2017~~July 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	~~1.92~~0.57	%
Dividend yield	~~1.1~~0.7	%
Volatility	~~34.0~~37.6	%
Expected term (in years)	~~5.6~~		4.6

The Company granted ~~62,185~~55,064 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 ~~nine~~six 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 ~~nine~~six months ended ~~September 29, 2017. Cash-settled~~July 2, 2021. RSUs are ~~accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stock~~generally 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 ~~nine~~six 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 ~~the~~its total return to shareholders over the vesting period relative to a peer group’s performance over the same period.

At ~~September 29, 2017, unearned~~July 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, 2017~~July 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, 2017~~July 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 ~~until~~to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses ~~currency~~ hedge contracts that are denominated in the same currency ~~as the underlying exposure and precious metal hedge contracts denominated in the same~~or 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’s~~derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.

~~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, 2017~~July 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 ~~relating~~in the second quarter of 2021 and $1.2 million of foreign currency gains related to ~~these~~ derivatives in the first six months of ~~$0.5~~2021, compared to $1.7 million and ~~$1.1~~$2.3 million ~~during~~of foreign currency gains in the ~~third~~second quarter and first ~~nine~~six 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, 2017~~July 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, 2017~~July 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 ~~2016~~2020 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, 2017~~July 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 ~~third~~second quarter of ~~2017 were $44.7~~2021 increased $99.5 million ~~higher than the $249.6~~from $271.5 million ~~recorded~~ in the ~~third~~second quarter of ~~2016.~~2020. Net sales increased in all of ~~$38.6 million~~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 ~~2017 were attributable to the high performance target materials business of the Heraeus Group (HTB). Changes~~2020. The change in precious metal and copper prices ~~negatively~~favorably impacted net sales induring the ~~third~~second quarter of ~~2017~~2021 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 ~~third~~second quarter of ~~2017~~2021 increased ~~$14.4~~$48.8 million, or 9%31%, compared to the ~~third~~second quarter of ~~2016. Value-added~~2020. 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 ~~third~~second quarter of ~~2017. Value-added sales~~2021 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 third~~second 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 ~~third~~second 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 ~~third~~second quarter of ~~2017, or $2.2~~2021, compared to $32.9 million ~~higher than the $34.2 million recorded~~ in the ~~third~~second 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 million~~our 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 percentage~~accounted for 3% of value-added sales ~~at approximately 2%~~ in the ~~third~~second quarter of both ~~2017~~2021 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 ~~third~~second quarter of ~~2017,~~2021, or a ~~$0.6~~$4.6 million increase from the ~~third~~second quarter of ~~2016. Other-net~~2020, 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 ~~third~~second quarter of ~~2017 included higher metal consignment fees~~2020, and $0.9 million of ~~$0.8 million, as compared~~increased intangible asset amortization expense, both related to the ~~third quarter~~acquisition 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 ~~third~~second quarter of ~~both 2017~~2021 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 ~~third~~second quarter of ~~2017~~2021 was ~~$1.7~~$3.3 million, compared to ~~$1.6~~$1.4 million in the ~~third~~second quarter of ~~2016.~~2020. The effective tax rate for the ~~third~~second quarter of ~~2017~~2021 and 2020 was 15.5% ~~compared~~and 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 effects~~impact of percentage depletion, ~~the foreign rate differential, the~~ research and development ~~credit, discrete benefits,~~credits, and ~~other items were~~ the ~~primary factors~~foreign 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 between~~first six months of 2021 increased $176.0 million from $549.4 million in the ~~effective and statutory rates~~first 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 ~~2017~~2020. 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 ~~nine~~six months of ~~2017 and 2016, respectively. Other-net~~2021, 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 ~~nine~~six months of ~~2017 included higher metal consignment fees~~2021, as well as $1.9 million of ~~$1.3 million, as compared~~increased intangible asset amortization expense, both of which were primarily related to the ~~first nine months~~acquisition 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.

Interest expense-net was ~~$1.7~~$1.6 million and $1.5 million in the first ~~nine~~six months of ~~2017, or a $0.3~~2021 and 2020, respectively.

Income tax expensefor the first half of 2021 was $6.7 million, ~~increase from $1.4~~compared to $0.4 million in the first ~~nine months~~half 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 months~~half of ~~2017~~2021 and 2020 was ~~14.4% compared to an~~16.3% and 16.0%, respectively. The effective tax rate for the first six months of ~~14.0% in~~both 2021 and 2020 was lower than the ~~prior-year period. The effects~~statutory tax rate primarily due to the impact of percentage depletion ~~the foreign rate differential, the~~and research and development ~~credit, discrete benefits, and other items were the primary factors~~credits. The effective tax rate for the ~~difference between 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 ~~and statutory rates in~~tax rate for the first ~~nine~~six months of ~~2017 and 2016. Refer~~2020 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.

2229

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 ~~nine~~six months of ~~2017~~2021 and ~~2016~~2020 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

~~Third~~Second 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	%

Net sales from the Performance Alloys and Composites segment of ~~$109.4~~$125.3 million in the ~~third~~second quarter of ~~2017 were 5% higher than~~2021 increased 23% compared to net sales of ~~$103.7~~$101.6 million in the ~~third~~second quarter of ~~2016 primarily~~2020. The increase was due to ~~higher~~ sales ~~volume~~ related to our new precision clad engineered strip project, as well as increased sales into the ~~industrial components, consumer electronics,~~automotive and ~~automotive electronics~~industrial end markets. ~~In addition, the impact of higher pass-through metal prices favorably impacted net sales by approximately $1.8 million.~~

Value-added sales of ~~$90.6~~$108.6 million in the ~~third~~second quarter of ~~2017~~2021 were 4%21% higher than value-added sales of ~~$87.2~~$89.8 million in the ~~third~~second quarter of 2016. The increase in value-added sales was driven by stronger demand in the aforementioned end markets of industrial components, consumer electronics, and automotive electronics, partially offset by a $3.1 million reduction in raw material beryllium hydroxide sales.2020.

Performance Alloys and Composites generated operating profit of $17.3 million in the second quarter of 2021 compared to $6.8 million in the ~~third~~second quarter of ~~2017 compared to $4.4 million in the third quarter of 2016.~~2020. The increase in operating profit was primarily due to ~~higher~~increased sales ~~volume, favorable product mix,~~volumes and ~~productivity improvements.~~improved operating performance. Operating profit for the second quarter of 2020 included restructuring charges of $2.4 million related to the closure of our Warren, Michigan and Fremont, California facilities.

Six Months

~~Nine Months~~


	Nine Months Ended									Six Months Ended
	Sept. 29,		Sept. 30,		$		%			July 2,		June 26,		$		%
(Thousands)	2017		2016		Change		Change		(Thousands)	2021		2020		Change		Change
Net sales	$	310,487	$	292,024	$	18,463	6	%	Net sales	$	239,437	$	200,681	$	38,756	19	%
Value-added sales	262,534		248,799		13,735		6	%	Value-added sales	209,430		173,471		35,959		21	%
Operating profit	12,523		6,103		6,420		105	%	Operating profit	30,805		10,347		20,458		198	%

Net sales from the Performance Alloys and Composites segment of ~~$310.5~~$239.4 million in the first ~~nine~~six months of ~~2017 were 6% higher than~~2021 increased 19% compared to net sales of ~~$292.0~~$200.7 million in the first ~~nine~~six months of ~~2016 primarily~~2020. The increase was due to sales related to our new precision clad engineered strip project, as well as increased ~~demand in~~sales into the ~~industrial components~~automotive and ~~consumer electronics~~aerospace and defense end markets. ~~The impact of higher pass-through metal prices favorably impacted net sales by approximately $5.9 million.~~

Value-added sales of ~~$262.5~~$209.4 million in the first ~~nine~~six months of ~~2017~~2021 were 6%21% higher than value-added sales of ~~$248.8~~$173.5 million in the first ~~nine~~six months of 2016. Stronger demand in the consumer electronics and industrial components end markets increased value-added sales by $11.4 million compared to the first nine months of 2016. Also, the increase in value-added sales was driven by higher raw material sales of beryllium hydroxide of $2.0 million.2020.

Performance Alloys and Composites generated operating profit of ~~$12.5~~$30.8 million in the first ~~nine~~six months of ~~2017~~2021 compared to ~~$6.1~~$10.3 million in the first ~~nine~~six months of ~~2016.~~2020. The increase in operating profit was primarily due to ~~higher~~increased sales ~~volume, favorable product mix,~~volumes. Operating profit for the first half of 2020 included restructuring charges of $4.6 million related to the closure of our Warren, Michigan and ~~productivity improvements.~~

Fremont, California facilities.

2431

Advanced Materials

~~Third~~Second 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	$	157,770	$	107,250	50,520	47	%	Net sales	$	213,114	$	150,108	63,006	42	%
Value-added sales	60,391		45,960		14,431	31	%	Value-added sales	66,900		52,164		14,736	28	%
Operating profit	9,756		8,245		1,511	18	%	Operating profit	8,333		4,653		3,680	79	%

Net sales from the Advanced Materials segment of ~~$157.8~~$213.1 million in the ~~third~~second quarter of ~~2017~~2021 were ~~47%~~42% higher than net sales of ~~$107.3~~$150.1 million in the ~~third~~second quarter of ~~2016~~2020. The increase in net sales was primarily due to ~~higher~~increased sales ~~volume. Net sales of $38.6 million during the third quarter of 2017 were attributable to our HTB acquisition. Also, net sales increased due to higher sales volume offset by~~volumes, as well as the impact of ~~lower~~higher pass-through metal prices of ~~$4.7~~$20.8 million.

Value-added sales of ~~$60.4~~$66.9 million in the ~~third~~second quarter of ~~2017 were 31% higher than~~2021 increased 28% compared to value-added sales of ~~$46.0~~$52.2 million in the ~~third~~second quarter of ~~2016. This~~2020. The increase ~~included~~was primarily driven by increased value-added sales ~~of $11.4 million attributable to our HTB acquisition. Also,~~into the ~~increase in value-added sales was driven by higher value-added sales to the consumer electronics~~semiconductor end ~~market of $2.2 million due primarily to higher demand.~~market.

The Advanced Materials segment generated operating profit of ~~$9.8 million in the third quarter of 2017 compared to~~ $8.3 million in the ~~third~~second quarter of ~~2016. Operating profit~~2021 compared to $4.7 million in the ~~third~~second quarter of ~~2017 was favorably impacted by higher~~2020. The increase in operating profit is due to increased sales ~~volume.~~volumes, as well as improved operating performance.

~~Nine~~Six Months


	Nine Months Ended								Six Months Ended
	Sept. 29,		Sept. 30,		$	%			July 2,		June 26,		$	%
(Thousands)	2017		2016		Change	Change		(Thousands)	2021		2020		Change	Change
Net sales	$	429,550	$	328,927	100,623	31	%	Net sales	$	417,758	$	310,273	107,485	35	%
Value-added sales	169,720		135,019		34,701	26	%	Value-added sales	129,849		106,657		23,192	22	%
Operating profit	24,873		20,748		4,125	20	%	Operating profit	17,266		9,703		7,563	78	%

Net sales from the Advanced Materials segment of ~~$429.6~~$417.8 million in the first ~~nine~~six months of ~~2017~~2021 were ~~31%~~35% higher than net sales of ~~$328.9~~$310.3 million in the first ~~nine~~six months of ~~2016. Net sales of $77.9 million during the first nine months of 2017 were attributable to the HTB acquisition. Also,~~2020. The increase in net sales ~~increased~~was primarily due to ~~a combination~~increased sales volumes, as well as the impact of ~~new product sales growth and demand in the consumer electronics and defense end markets.~~higher pass-through metal prices of $39.8 million.

Value-added sales of ~~$169.7~~$129.8 million in the first ~~nine months~~half of ~~2017 were 26% higher than~~2021 increased 22% compared to value-added sales of ~~$135.0~~$106.7 million in the first ~~nine months~~half of ~~2016. This~~2020. The increase ~~included~~was primarily driven by increased value-added sales ~~of $24.9 million attributable to our HTB acquisition. The increase in value-added sales was also driven by higher value-added sales to~~into the ~~consumer electronics~~semiconductor end market. Value-added sales to the consumer electronics end market, which represents approximately 49% of total segment value-added sales, increased $7.2 million due primarily to higher demand, excluding the HTB acquisition.

The Advanced Materials segment generated operating profit of ~~$24.9~~$17.3 million in the first ~~nine months~~half of ~~2017~~2021 compared to ~~$20.7~~$9.7 million in the first ~~nine months~~half of ~~2016. As a percentage of value-added sales,~~2020. The increase in operating profit ~~was 15% in the first nine months of both 2017 and 2016. Operating profit in the first nine months of 2017 was favorably impacted by higher~~is due to increased sales ~~volume.~~volumes, as well as improved operating performance.

2532

Precision ~~Coatings~~Optics

~~Third~~Second Quarter


(Thousands)	Third Quarter Ended								(Thousands)	Second Quarter Ended
	Sept. 29,		Sept. 30,		$		%			July 2,		June 26,		$	%
	2017		2016		Change		Change			2021		2020		Change	Change
Net sales	$	27,105	$	38,670	(11,565	)	(30	)%	Net sales	$	32,591	$	19,746	12,845	65	%
Value-added sales	21,896		25,803		(3,907	)	(15	)%	Value-added sales	32,582		17,778		14,804	83	%
Operating profit	1,613		3,432		(1,819	)	(53	)%	Operating profit	2,626		2,091		535	26	%

Net sales from the Precision ~~Coatings~~Optics segment of ~~$27.1~~$32.6 million in the ~~third~~second quarter of ~~2017 were 30% lower than~~2021 increased 65% compared to net sales of ~~$38.7~~$19.7 million in the ~~third~~second quarter of ~~2016~~2020. The increase was primarily due to ~~lower~~ sales ~~volume.~~attributable to our Optics Balzers acquisition, partially offset by no sales related to our LAC reporting unit, whose closure was finalized in the first quarter of 2021. In addition the base business increased slightly compared to the same period last year.

Value-added sales of ~~$21.9~~$32.6 million in the ~~third~~second quarter of ~~2017 were 15% lower than~~2021 increased 83% compared to value-added sales of ~~$25.8~~$17.8 million in the ~~third~~second quarter of ~~2016.~~2020. The ~~defense and industrial components end markets increased $1.3 million primarily~~increase in value-added sales was due to ~~end market demand. This~~the same factors driving the increase ~~was more than offset by a decrease~~in net sales.

The Precision Optics segment generated an operating profit of ~~$4.9~~$2.6 million in the ~~medical end market due to lower volume in the blood glucose test strip segment of the medical end market.~~

~~The Precision Coatings segment generated operating profit of $1.6 million in the third~~second quarter of ~~2017,~~2021, compared to an operating profit of ~~$3.4~~$2.1 million in the ~~third~~second quarter of ~~2016.~~2020. The ~~decrease in operating profit~~increase was driven by ~~lower sales volume and $0.4 million of cost reduction initiatives, primarily severance, associated with reducing headcount in Asia and North America.~~our Optics Balzers acquisition.

~~Nine~~

Six Months


(Thousands)	Six Months Ended
	July 2,		June 26,		$	%
	2021		2020		Change	Change
Net sales	$	68,190	$	38,460	29,730	77	%
Value-added sales	68,147		34,767		33,380	96	%
Operating profit (loss)	7,184		(7,501)		14,685	NM

(Thousands) Nine Months Ended
Sept. 29, Sept. 30, $ %
2017 2016 Change Change
Net sales $ 90,742
$ 113,955
(23,213 ) (20 )%
Value-added sales 67,810
75,548
(7,738 ) (10 )%
Operating profit 6,145
9,803
(3,658 ) (37 )%
NM = Not Meaningful

Net sales from the Precision ~~Coatings~~Optics segment of ~~$90.7~~$68.2 million in the first ~~nine months~~half of ~~2017 were 20% lower than~~2021 increased 77% compared to net sales of ~~$114.0~~$38.5 million in the first ~~nine months~~half of ~~2016~~2020. The increase was primarily due to sales attributable to our Optics Balzers acquisition, partially offset by lower sales ~~volume.~~related to our LAC reporting unit, whose closure was finalized in the first quarter of 2021.

Value-added sales of ~~$67.8~~$68.1 million in the first ~~nine months~~half of ~~2017 were 10% lower than~~2021 increased 96% compared to value-added sales of ~~$75.5~~$34.8 million in the first ~~nine months~~half of ~~2016.~~2020. The ~~defense and industrial components end markets increased $3.6 million primarily~~increase in value-added sales was due to ~~stronger end market demand. This~~the same factors driving the increase ~~was more than offset by a decrease of $8.4 million~~ in ~~the medical end market due to lower volume in the blood glucose test strip segment of the medical end market.~~net sales.

The Precision ~~Coatings~~Optics segment generated an operating profit of ~~$6.1~~$7.2 million in the first ~~nine~~six months of ~~2017~~2021, compared to ~~$9.8~~an operating loss of $7.5 million in the first ~~nine~~six months of ~~2016.~~2020. The ~~decrease in~~ operating profit in the first ~~nine~~six months of ~~2017 versus the comparable period of 2016~~2021 was ~~due to lower sales volume, cost reduction initiatives of $0.4 million, and the absence of a gain on the sale of equipment of $0.8 million realized during~~driven by our Optics Balzers acquisition. The operating loss in the first ~~nine~~six months of ~~2016.~~2020 included impairment charges of $10.8 million related to our LAC reporting unit.

Other

~~Third~~Second Quarter


(Thousands)	Third Quarter Ended										(Thousands)	Second Quarter Ended
	Sept. 29,			Sept. 30,			$		%			July 2,		June 26,		$	%
	2017			2016			Change		Change			2021		2020		Change	Change
Net sales	$	—		$	—		—		—	%	Net sales	$	—	$	—	—	—	%
Value-added sales	(1,542		)	(2,009		)	467		(23	)%	Value-added sales	(193)		(630)		437	(69)	%
Operating loss	(6,597		)	(5,883		)	(714	)	12	%	Operating loss	(7,550)		(5,997)		(1,553)	26	%



Ohio		34-1919973
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~6070 Parkland Blvd., Mayfield Heights, Ohio~~	~~44124~~
~~(Address of principal executive offices)~~	~~(Zip Code)~~


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	MTRN	New York Stock Exchange



~~Large accelerated filer~~ þ			~~Accelerated filer~~ ¨
~~Non-accelerated filer~~ ¨ ~~(Do not check if a smaller reporting company)~~			~~Smaller reporting company~~ ¨
			~~Emerging growth company~~ ¨



ý	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~



¨	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~



(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



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


	September 29,			December 31,				July 2,		December 31,
(Thousands)	2017			2016			(Thousands)	2021		2020
Cash and cash equivalents							Cash and cash equivalents	$	24,345	$	25,878
Total outstanding debt	$	4,007		$	4,615		Total outstanding debt	59,273		38,506
Cash	22,486			31,464
Net debt (cash)	(18,479		)	(26,849		)
Net debt							Net debt	$	(34,928)	$	(12,628)
Available borrowing capacity	$	266,405		$	238,886		Available borrowing capacity	$	272,989	$	245,772
Debt-to-debt-plus-equity ratio	1		%	1		%


▪	~~Actual net sales, operating rates, and margins for 2017;~~


▪	~~Our ability to effectively integrate the HTB acquisition;~~


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


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


▪	~~Our success in developing and introducing new products and new product ramp-up rates;~~


▪	~~Our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values;~~


▪	~~Our success in identifying acquisition candidates and in acquiring and integrating such businesses;~~


▪	~~The impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions;~~


▪	~~Our success in implementing our strategic plans and the timely and successful completion and start-up of any capital projects;~~


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


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


▪	~~Changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations;~~


▪	~~The conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects;~~


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



Item 3.			Quantitative and Qualitative Disclosures about Market Risk



Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 through August 4, 2017	895	$	38.42	—	$	15,703,744
August 5 through September 1, 2017	401	38.16		—	15,703,744
September 1 through September 29, 2017	1,062	42.88		—	15,703,744
Total	2,358	$	40.38	—	$	15,703,744



(1)			Includes ~~895, 401,~~1,680, 621, and ~~1,062~~163 shares surrendered to the Company in ~~July, August,~~April, May, and ~~September,~~June, respectively, by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.

(2)			On January 14, 2014, wethe Company announced that ~~our~~its Board of Directors had authorized the repurchase of up to $50.0 million of ~~our~~its common stock. WeDuring the three months ended July 2, 2021, the Company did not repurchase any shares under this ~~program during the third quarter of 2017.~~program. As of ~~September 29, 2017, $15.7~~July 2, 2021, $8.3 million may still be purchased under the program.


31.1						Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)*
31.2						Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)*
32						Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350*
95						Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended September 29, 2017July 2, 2021
101.INS						XBRL Instance DocumentDocument - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						Inline XBRL Taxonomy Extension Schema Document*
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Exhibit 101 attachments)