UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
(Mark One)
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2017July 1, 2022
OR
 
☐ TRANSITION 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

For the transition period from             to             
Commission file number 001-15885
MATERION CORPORATION
(Exact name of Registrant as specified in charter)
Ohio34-1919973
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
6070 Parkland Blvd., Mayfield Heights, Ohio44124
(Address of principal executive offices)(Zip Code)
6070 Parkland Blvd., Mayfield Heights, Ohio 44124
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
216-486-4200(216)-486-4200

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueMTRNNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ       No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer  ¨
Large accelerated filer  þ
Accelerated filer  ¨
   Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
Non-accelerated filer  ¨ Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No  þ

Number of Shares of Common Stock, without par value, outstanding at September 29, 2017: 20,043,474.July 1, 2022: 20,523,736.






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

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


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




1




Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)

 Second Quarter EndedSix Months Ended
(Thousands, except per share amounts)July 1, 2022July 2, 2021July 1, 2022July 2, 2021
Net sales$445,295 $370,999 $894,340 $725,385 
Cost of sales357,868 301,418 731,622 589,008 
Gross margin87,427 69,581 162,718 136,377 
Selling, general, and administrative expense42,047 38,060 83,708 74,836 
Research and development expense7,592 6,604 14,666 12,810 
Restructuring expense (income) — 1,076 (378)
Other—net5,928 4,194 11,801 8,668 
Operating profit31,860 20,723 51,467 40,441 
Other non-operating income—net(1,168)(1,277)(2,337)(2,553)
Interest expense—net4,701 858 8,437 1,619 
Income before income taxes28,327 21,142 45,367 41,375 
Income tax expense5,072 3,274 8,093 6,740 
Net income$23,255 $17,868 $37,274 $34,635 
Basic earnings per share:
Net income per share of common stock$1.13 $0.87 $1.82 $1.70 
Diluted earnings per share:
Net income per share of common stock$1.12 $0.87 $1.80 $1.68 
Weighted-average number of shares of common stock outstanding:
Basic20,517 20,429 20,491 20,402 
Diluted20,723 20,651 20,743 20,647 
  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

































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







2




Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 Second Quarter EndedSix Months Ended
 July 1,July 2,July 1,July 2,
(Thousands)2022202120222021
Net income$23,255 $17,868 $37,274 $34,635 
Other comprehensive income (loss):
Foreign currency translation adjustment(6,343)3,193 (8,390)(5,664)
Derivative and hedging activity, net of tax1,894 (273)4,164 972 
Pension and post-employment benefit adjustment, net of tax16 83 (224)247 
Other comprehensive income (loss)(4,433)3,003 (4,450)(4,445)
Comprehensive income$18,822 $20,871 $32,824 $30,190 
  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









































































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






3




Materion Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
July 1,Dec. 31,
(Thousands)20222021
Assets
Current assets
Cash and cash equivalents$32,175 $14,462 
Accounts receivable, net222,811 223,553 
Inventories, net422,376 361,115 
Prepaid and other current assets29,606 28,122 
Total current assets706,968 627,252 
Deferred income taxes5,018 5,431 
Property, plant, and equipment1,164,273 1,132,223 
Less allowances for depreciation, depletion, and amortization(739,776)(723,248)
Property, plant, and equipment, net424,497 408,975 
Operating lease, right-of-use assets68,045 63,096 
Intangible assets, net148,364 156,736 
Other assets30,228 27,369 
Goodwill319,994 318,620 
Total Assets$1,703,114 $1,607,479 
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt$15,333 $15,359 
Accounts payable113,708 86,243 
Salaries and wages22,239 37,544 
Other liabilities and accrued items49,148 53,388 
Income taxes1,700 4,205 
Unearned revenue8,097 7,770 
Total current liabilities210,225 204,509 
Other long-term liabilities15,846 14,954 
Operating lease liabilities62,474 57,099 
Finance lease liabilities14,360 16,327 
Retirement and post-employment benefits30,992 33,394 
Unearned income108,126 97,962 
Long-term income taxes1,206 1,190 
Deferred income taxes28,766 27,216 
Long-term debt481,965 434,388 
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued) — 
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both July 1st and December 31st)
281,296 271,978 
Retained earnings725,918 693,756 
Common stock in treasury(218,356)(209,920)
Accumulated other comprehensive loss(44,619)(40,169)
Other equity4,915 4,795 
Total shareholders' equity749,154 720,440 
Total Liabilities and Shareholders’ Equity$1,703,114 $1,607,479 


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

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






4




Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended Six Months Ended
 Sept. 29, Sept. 30, July 1,July 2,
(Thousands) 2017 2016(Thousands)20222021
Cash flows from operating activities:    Cash flows from operating activities:
Net income $19,683
 $18,962
Net income$37,274 $34,635 
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 amortization26,070 19,063 
Amortization of deferred financing costs in interest expense 670
 417
Amortization of deferred financing costs in interest expense780 364 
Stock-based compensation expense (non-cash) 4,303
 2,880
Stock-based compensation expense (non-cash)3,694 3,512 
(Gain) loss on sale of property, plant, and equipment 207
 (601)
Deferred income tax expense (benefit) 1,073
 (676)Deferred income tax expense (benefit)1,966 367 
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)
Changes in assets and liabilities:Changes in assets and liabilities:
Accounts receivable
Accounts receivable
(2,566)(13,941)
InventoryInventory(67,304)(40,651)
Prepaid and other current assetsPrepaid and other current assets(2,462)(1,718)
Accounts payable and accrued expensesAccounts payable and accrued expenses8,897 28,403 
Unearned revenueUnearned revenue(141)3,246 
Interest and taxes payable
Interest and taxes payable
(1,765)2,868 
Unearned income due to customer prepaymentsUnearned income due to customer prepayments13,059 8,043 
Other-net (1,324) 2,479
Other-net3,913 (126)
Net cash provided by operating activities 35,497
 27,222
Net cash provided by operating activities21,415 44,065 
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(37,730)(57,712)
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 equipment105 603 
Payments for acquisition, net of cash acquiredPayments for acquisition, net of cash acquired(2,971) 
Net cash used in investing activities (34,830) (27,620)Net cash used in investing activities(40,596)(57,109)
Cash flows from financing activities:    Cash flows from financing activities:
Proceeds from issuance of short-term debt, net 
 3,777
Proceeds from borrowings under revolving credit agreement, netProceeds from borrowings under revolving credit agreement, net52,794 22,500 
Proceeds from issuance of long-term debt 55,000
 10,000
Proceeds from issuance of long-term debt2,059 — 
Repayment of long-term debt (55,608) (10,517)Repayment of long-term debt(7,177)(1,654)
Principal payments under capital lease obligations (644) (549)
Principal payments under finance lease obligationsPrincipal payments under finance lease obligations(1,334)(1,512)
Cash dividends paid (5,903) (5,601)Cash dividends paid(5,112)(4,791)
Deferred financing costs (300) (1,000)
Common shares withheld for taxes (2,397) (868)
Repurchase of common stock (1,086) (3,798)
Net cash used in financing activities (10,938) (8,556)
Payments of withholding taxes for stock-based compensation awardsPayments of withholding taxes for stock-based compensation awards(2,812)(3,021)
Net cash provided by financing activitiesNet cash provided by financing activities38,418 11,522 
Effects of exchange rate changes 1,293
 524
Effects of exchange rate changes(1,524)(11)
Net change in cash and cash equivalents (8,978) (8,430)Net change in cash and cash equivalents17,713 (1,533)
Cash and cash equivalents at beginning of period 31,464
 24,236
Cash and cash equivalents at beginning of period14,462 25,878 
Cash and cash equivalents at end of period $22,486
 $15,806
Cash and cash equivalents at end of period$32,175 $24,345 


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





5


Materion Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Unaudited)
Common SharesShareholders' Equity
(Thousands, except per share amounts)Common SharesCommon Shares Held in TreasuryCommon
Stock
Retained
Earnings
Common
Stock in
Treasury
Accumulated Other
Comprehensive
Loss
Other
Equity
Total
Balance at April 1, 202220,511 (6,637)$278,589 $705,255 $(217,549)$(40,186)$4,855 $730,964 
Net income— — — 23,255 — — — 23,255 
Other comprehensive income— — — — — (4,433)— (4,433)
Cash dividends declared ($0.125 per share)— — — (2,592)— — — (2,592)
Stock-based compensation activity13 13 2,671 — (676)— — 1,995 
Payments of withholding taxes for stock-based compensation awards(1)(1)— — (95)— — (95)
Directors’ deferred compensation— — 36 — (36)— 60 60 
Balance at July 1, 202220,523 (6,625)$281,296 $725,918 $(218,356)$(44,619)$4,915 $749,154 
Balance at April 2, 202120,414 (6,734)$264,940 $645,468 $(206,845)$(46,087)$3,860 $661,336 
Net income— — — 17,868 — — — 17,868 
Other comprehensive income— — — — — 3,003 — 3,003 
Cash dividends declared ($0.120 per share)— — — (2,453)— — — (2,453)
Stock-based compensation activity25 25 3,215 (32)(1,144)— — 2,039 
Payments of withholding taxes for stock-based compensation awards(2)(2)— — (183)— — (183)
Directors’ deferred compensation50 — (682)— 723 91 
Balance at July 2, 202120,438 (6,710)$268,205 $660,851 $(208,854)$(43,084)$4,583 $681,701 




6


Common SharesShareholders' Equity
(Thousands, except per share amounts)Common SharesCommon Shares Held in TreasuryCommon
Stock
Retained
Earnings
Common
Stock in
Treasury
Accumulated Other
Comprehensive
Loss
Other
Equity
Total
Balance at December 31, 202120,448 (6,700)$271,978 $693,756 $(209,920)$(40,169)$4,795 $720,440 
Net income— — — 37,274 — — — 37,274 
Other comprehensive loss— — — — — (4,450)— (4,450)
Cash dividends declared ($0.245 per share)— — — (5,112)— — — (5,112)
Stock-based compensation activity108 108 9,243 — (5,549)— — 3,694 
Payments of withholding taxes for stock-based compensation awards(34)(34)— — (2,812)— — (2,812)
Directors’ deferred compensation75 — (75)— 120 120 
Balance at July 1, 202220,523 (6,625)$281,296 $725,918 $(218,356)$(44,619)$4,915 $749,154 
Balance at December 31, 202020,328 (6,820)$258,642 $631,058 $(199,187)$(38,639)$3,756 $655,630 
Net income— — — 34,635 — — — 34,635 
Other comprehensive loss— — — — — (4,445)— (4,445)
Cash dividends declared ($0.235 per share)— — — (4,791)— — — (4,791)
Stock-based compensation activity152 152 9,474 (51)(5,911)— — 3,512 
Payments of withholding taxes for stock-based compensation awards(45)(45)— — (3,021)— — (3,021)
Directors’ deferred compensation$89 $— $(735)$— $827 $181 
Balance at July 2, 202120,438 (6,710)$268,205 $660,851 $(208,854)$(43,084)$4,583 $681,701 
















See notes to these consolidated financial statements.


7


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 have been reclassified to conform to the 2017 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 20162021 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 toof the Consolidated Financial Statementsconsolidated financial statements are the results of thea preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.

New Pronouncements Adopted:
In March 2016,2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, ImprovementsReporting. This guidance is intended to Employee Share-Based Payment Accounting, which impacts several aspects ofprovide 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 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 December 31, 2022. The Company has applied this guidance in accounting for share-based payment transactions, including income tax consequences, classificationthe interest rate swap discussed in Note N. Any additional reference rate reform impacts will be accounted for in accordance with ASU 2020-04.

New Accounting Guidance Issued and Not Yet Adopted:
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832). ASU 2021-10 is intended to increase transparency related to governmental assistance by requiring entities to disclose the types of awards as either equity or liabilities, and classification ongovernment assistance, 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,entity's accounting for government assistance, and the tax effectseffect of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. An entity will also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the reporting period. Excess tax benefits will be classified, along with other income tax cash flows, asgovernment assistance on 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, whichentity's financial statements. This new guidance is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interimall entities for annual reporting periods within those fiscal years, beginning after December 15, 2016.2021. 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 months ended September 30, 2016, cash flows from operating activities increased by $868 with a corresponding decrease 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.
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



6


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


those periods, with early adoption permitted. The amendments should be applied retrospectively for the presentation of service cost and other components of net benefit cost on the income statement and prospectively for the capitalization of service cost and net periodic postretirement benefits in assets. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which eliminates the off-balance-sheet accounting for leases. The new guidance will require lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount, and timing of revenue and cash flows arising from contracts. This ASU is effective beginning in fiscal year 2018 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. To evaluate the impact of adopting this new guidance on the consolidated financial statements, the Company established a cross-functional implementation team to assess its revenue streams against the requirements of this ASU. In addition, the Company is in the process of identifying and implementing changes to its processes and controls to meet the standard's updated reporting and disclosure requirements. The Company plans to adopt the standard as of the first quarter of 2018 using the modified retrospective approach and will record a cumulative-effect adjustment to equity for open contracts as of January 1, 2018. The Company continues to update its assessment ofevaluating the impact of the standard and related updates toguidance on its consolidated financial statements, and will disclose material impacts, if any.annual disclosures.
No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.










8


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note B — AcquisitionsAcquisition


On February 28, 2017,November 1, 2021, the Company acquired the targetindustry-leading electronic materials business of H.C. Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $398.9 million, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism. During the Heraeus Group (HTB),six months ended July 1, 2022, acquisition-related inventory step-up expense was $7.5 million and classified in Cost of Hanau, Germany, for $16.5 million. This business manufactures preciousSales and non-precious metal target materialstransaction and integration costs were $2.6 million and classified in Selling, General and Administrative expenses in the accompanying consolidated statements of income. The Company financed the purchase price for the architecturalHCS-Electronic Materials acquisition with a new $300 million five-year term loan pursuant to a delayed draw term loan facility executed in October 2021 and automotive glass, electronic display, photovoltaic, and semiconductor markets at facilities in Germany, Taiwan, and$103 million of borrowings under its amended revolving credit facility. The maturity date on the United States.revolving credit facility was also extended to October 2026. The interest rate for the term loan is based on LIBOR plus a tiered credit spread that is indexed to the Company's quarterly leverage ratio. This acquired business operates within the AdvancedPerformance Materials segment,and Electronic Materials segments, and the results of operations are included as of the date of acquisition. The combination of Materion and HCS-Electronic Materials enhances the Company's position as the leading supplier to the high growth semiconductor industry.


The fair value estimates of the assets acquired are subject to adjustment during the measurement period (up to one year from the HCS-Electronic Materials Acquisition Date). The primary areas of accounting for the HCS Acquisition that are not yet finalized relate to the fair value of contingencies, income tax accruals, and the impact on residual goodwill. The fair values of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While we believe that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired and liabilities assumed, we will evaluate any additional information prior to finalization of the fair value. During the measurement period, we will adjust preliminary valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the HCS Acquisition Date that, if known, would have resulted in revised values for these items as of that date. The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.

During the period subsequent to the HCS-Electronic Materials acquisition, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period. Additionally, we paid a working capital true-up of approximately $3.0 million during the second quarter of 2022 which increased the total purchase price. The preliminary purchase price allocation for the acquisition including these measurement period adjustments is as follows:





79



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


(Thousands)Initial Allocation of ConsiderationMeasurement Period AdjustmentsUpdated Allocation
Assets:
Cash and cash equivalents$3,685 $— $3,685 
Accounts receivable28,352 — 28,352 
Inventories70,681 — 70,681 
Prepaid and other current assets660 (355)305 
Property, plant, and equipment44,681 355 45,036 
Operating lease, right-of-use assets6,120 — 6,120 
Intangible assets107,800 — 107,800 
Other long-term assets4,528 — 4,528 
Goodwill178,181 3,688 181,869 
Total assets acquired$444,688 $3,688 $448,376 
Liabilities:
Accounts payable$12,139 $$12,139 
Salaries and wages2,516 4352,951 
Other liabilities and accrued items28 28 
Income taxes2,183 792,262 
Other long-term liabilities5,543 2155,758 
Operating lease liabilities6,042 6,042 
Deferred income taxes20,300 20,300 
Total liabilities assumed$48,751 $729 $49,480 
Net assets acquired$395,937 $2,959 $398,896 
The Company will make adjustments to the purchase price allocation prior to completion of the measurement period, as necessary. Only items identified
Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date will bedate. The Company engaged specialists to assist in the valuation of inventories, property, plant, and equipment, and intangible assets.

In determining the fair value of the amounts above, inventory is fair valued based on the comparative sales method for work in process and finished goods at the selling price less cost to dispose and remaining manufacturing effort. The remaining working capital accounts' carrying values approximate fair value. For property, plant and equipment and intangible asset values, the Company utilized various forms of the income, cost and market approaches depending on the asset being valued. The Company used a relief from royalty method under the income approach to value its trade names and the developed technology and the multi-period excess earnings method under the income approach to value customer relationships. The significant assumptions used to estimate the fair value of these intangible assets included the discount rate and certain assumptions that form the basis of forecasted future cash flows (including revenue growth rates, royalty rates for trade names and developed technology, and attrition rates for customer relationships). Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions and are considered for subsequent adjustment. The purchase price allocation forLevel 3 assets as the acquisition is as follows:assumptions are unobservable inputs developed by the Company.
(Thousands)Amount
Assets: 
Inventories$7,221
Prepaid and other current assets1,107
Long-term deferred income taxes1,450
Property, plant, and equipment7,637
Intangible assets3,236
Goodwill2,605
Total assets acquired$23,256
  
Liabilities: 
Other liabilities and accrued items$1,030
Other long-term liabilities430
Retirement and post-employment benefits5,292
Total liabilities assumed$6,752
  
Total purchase price$16,504


As part of the acquisition, the Company recorded approximately $2.6$181.9 million of goodwill.goodwill allocated between its Electronic Materials and Performance Materials segments based on the relative fair values. 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,acquired and primarily attributable to the Company acquired approximately $3.2 million of other intangible assets, which willsynergies expected to arise after the acquisition dates. The goodwill is not expected to be amortized using the straight-line method over an average life of about ten years. deductible for U.S. tax purposes.

The following table reports the intangible assets by asset category and useful life:

as of the closing date:


10


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(Thousands) Value at Acquisition Useful Life
Customer relationships $1,861
 15 years
Technology 1,375
 3 years
Total $3,236
  
(Thousands)Value at AcquisitionUseful Life
Customer relationships$50,200 13 years
Technology35,300 13 years
Trade name22,300 15 years
Total$107,800 


The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials in the second quarter of 2022 consolidated statements are $43.6 million and $7.6 million, respectively. Full year revenue and income before taxes total $86.9 million and $6.0 million, respectively. Income before taxes includes the purchase accounting inventory step-up expense recorded in the first quarter of 2022. Had the HCS-Electronic Materials acquisition occurred as of the beginning of fiscal 2020, the Company's sales and income (loss) before taxes would have been as follows:
(Unaudited)
Three months endedSix months ended
July 2, 2021July 2, 2021
Net Sales$409,202 $794,586 
Profit income (loss) before taxes$22,138 $41,135 

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments that assume the acquisition occurred on January 1, 2020. These unaudited pro forma results do not represent financial results realized, nor are they intended to be a projection of future results. The transaction accounting adjustments and other adjustments are based on available information and assumptions that the Company’s management believes are reasonable. Such adjustments are estimates and actual experience may differ from expectations. The pro forma income (loss) before taxes for the second quarter ended and six months ended July 2, 2021 includes approximately $4.3 million and $7.2 million, respectively, of additional interest expense related to committed financing to fund the acquisition and acquisition-related intangible asset amortization expense of $2.0 million and $4.0 million, respectively, as if the acquisition occurred on January 1, 2020.


Note C — Segment Reporting
 
The Company haschanged two segment names during the following operating segments:first quarter of 2022: Performance Alloys and Composites became Performance Materials, and Advanced Materials became Electronic Materials. The Company believes these names better represent the markets served and the advanced next-generation product solutions provided to our customers. Other than the name changes, there were no changes in the composition or structure of the Company's reportable segments in the first half of 2022.

The Company has the following reportable segments: Performance Materials, Electronic Materials, Precision Coatings,Optics, and Other. The Company’s operatingreportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker,chief operating decision maker, in determining how to allocate the Company’s resources and evaluate performance.

Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals,Materials provides advanced engineered solutions comprised of beryllium and aluminum metal matrix composites,non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, sheet, foil,plate, bar, tube, and a variety ofother customized forms, beryllia ceramics, and bulk metallic glass materials.shapes.
Advanced
Electronic Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.

Precision CoatingsOptics produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.





11
8


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

The Other reportable segment includes unallocated corporate costs and assets.


Beginning with the first quarter of 2022, the Company began using earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) as the main operating income metric used by management to measure the financial performance of the Company and each segment. The Company made this change because recent acquisitions have resulted in increased purchase accounting amortization expense, which in turn has affected the comparability of results across periods and when compared to other companies. Management believes EBITDA is useful to investors as it better represents the Company's performance excluding the effect of the recent acquisition of significant intangible assets that are now being amortized. EBITDA is not a measurement of financial performance under U.S. GAAP. Although the Company uses EBITDA to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with U.S. GAAP.
(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 below table presents financial information for each segment and a reconciliation of EBITDA to Net Income (the most directly comparable GAAP financial measure) for the second quarter of 2022 and 2021:
Intersegment
(Thousands)Second Quarter 2022Second Quarter 2021First Six Months Ended 2022First Six Months Ended 2021
Net sales:
Performance Materials(1)
$154,889 $125,294 $304,520 $239,437 
Electronic Materials(1)
260,971 213,114 531,807 417,758 
Precision Optics29,435 32,591 58,013 68,190 
Other —  — 
Net sales445,295 370,999 894,340 725,385 
Segment EBITDA:
Performance Materials$27,229 $22,318 $52,021 $39,110 
Electronic Materials22,337 10,412 34,484 21,342 
Precision Optics3,544 5,547 5,735 13,018 
Other(7,191)(5,813)(12,366)(11,413)
Total Segment EBITDA45,919 32,464 79,874 62,057 
Income tax expense5,072 3,274 8,093 6,740 
Interest expense - net4,701 858 8,437 1,619 
Depreciation, depletion and amortization12,891 $10,464 $26,070 $19,063 
Net income$23,255 $17,868 $37,274 $34,635 

(1) Excludes inter-segment sales of $0.2 million for the second quarter of 2022 and $0.5 million for the first six months of 2022 for Performance Materials and $2.7 million for the second quarter of 2022 and $8.2 million for the first six months of 2022 for Electronic Materials. Also excludes inter-segment sales of $3.2 million for the second quarter of 2021 and $5.9 million for the first six months of 2021 for Electronic Materials. Inter-segment sales are eliminated in consolidation.













12

Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The following table disaggregates revenue for each segment by end market for the second quarter and first six months of 2022 and 2021:
 (Thousands)Performance MaterialsElectronic MaterialsPrecision OpticsOtherTotal
Second Quarter 2022
End Market
Semiconductor$2,446 $213,742 $1,530 $ $217,718 
Industrial41,701 11,957 7,608  61,266 
Aerospace and defense27,615 1,284 3,666  32,565 
Consumer electronics16,212 280 5,814  22,306 
Automotive24,855 1,465 2,708  29,028 
Energy10,679 25,361   36,040 
Telecom and data center16,223 21   16,244 
Other15,158 6,861 8,109  30,128 
Total$154,889 $260,971 $29,435 $ $445,295 
Second Quarter 2021
End Market
Semiconductor$1,806 $166,968 $563 $— $169,337 
Industrial30,264 10,687 7,634 — 48,585 
Aerospace and defense19,250 1,660 5,597 — 26,507 
Consumer electronics10,722 266 6,964 — 17,952 
Automotive25,766 1,757 2,107 — 29,630 
Energy4,880 24,216 — — 29,096 
Telecom and data center13,025 39 — — 13,064 
Other19,581 7,521 9,726 — 36,828 
Total$125,294 $213,114 $32,591 $— $370,999 



13

Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 (Thousands)Performance MaterialsElectronic MaterialsPrecision OpticsOtherTotal
First Six Months 2022
End Market
Semiconductor$4,246 $428,664 $2,857 $ $435,767 
Industrial82,520 27,823 16,041  126,384 
Aerospace and defense51,299 3,898 8,812  64,009 
Consumer electronics29,215 605 11,126  40,946 
Automotive47,091 3,122 5,026  55,239 
Energy20,778 54,481   75,259 
Telecom and data center32,303 65   32,368 
Other37,068 13,149 14,151  64,368 
Total$304,520 $531,807 $58,013 $ $894,340 
First Six Months 2021
End Market
Semiconductor$2,803 $322,029 $1,034 $— $325,866 
Industrial54,294 23,277 15,009 — 92,580 
Aerospace and defense41,092 3,058 12,173 — 56,323 
Consumer electronics20,766 431 16,424 — 37,621 
Automotive49,273 3,426 4,300 — 56,999 
Energy9,017 51,406 — — 60,423 
Telecom and data center24,368 109 — — 24,477 
Other37,824 14,022 19,250 — 71,096 
Total$239,437 $417,758 $68,190 $— $725,385 

Note D — Other-netRevenue Recognition
Other-net expense
Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue in an amount that reflects the consideration to which it expects to be entitled upon satisfaction of a performance obligation by transferring control over a product to the customer. Control over a 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 1, 2022. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the third quarter and first nine monthspractical expedient at July 1, 2022, the aggregate amount of 2017 and 2016 is summarized as follows:the transaction price allocated to remaining performance obligations was approximately $76.3 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


14


9



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 1, 2022December 31, 2021$ change% change
Accounts receivable, trade$213,221 $213,584 $(363)— %
Unbilled receivables8,916 7,961 955 12 %
Unearned revenue8,097 7,770 327 %
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 related to our receivables were immaterial during the second quarter of 2022.

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 $5.6 million of the December 31, 2021 unearned amounts as revenue during the first six months of 2022.

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 — RestructuringOther-net
In 2017,
Other-net for the Company completed cost reduction actions in order to align costs with commensurate business levels. These actions were accomplished through eliminationsecond quarter and first six months of vacant positions, consolidation of roles,2022 and staff reduction. Costs associated with these actions within the Other and Precision Coatings segments included severance associated with approximately twenty-three employees and other related costs.
In 2016, the Company initiated a plan to close the Fukuya, Japan service center, which2021 is a part of the Performance Alloys and Composites segment. Costs associated with the plan included severance associated with approximately twelve employees and related facility exit costs.
These costs are presented in the Consolidated Statements of Incomesummarized 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
 $
 Second Quarter EndedSix Months Ended
 July 1,July 2,July 1,July 2,
(Thousands)2022202120222021
Amortization of intangible assets$3,099 $1,005 $6,230 $2,178 
Metal consignment fees2,871 2,464 5,882 4,614 
Foreign currency (gain) loss28 (33)(305)1,216 
Net loss (gain) on disposal of fixed assets29 24 18 (364)
Other items(99)734 (24)1,024 
Total$5,928 $4,194 $11,801 $8,668 
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, anCompany's effective tax rate for the second quarter of 15.5% against income before income taxes,2022 and income tax expense of $1.6 million2021 was 17.9% and 15.5%, respectively, and 17.8% and 16.3% in the third quarterfirst six months of 2016, an2022 and 2021, respectively. The 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%,for each period in 2022 and income tax expense of $3.1 million in the first nine months of 2016, an effective tax rate of 14.0%.
The Company recorded discrete benefits of $0.5 million and $1.3 million, respectively, in the third quarter and first nine months of 2017. Of these amounts, $0.4 million related to the reversal of uncertain tax positions due to a lapse in the statute of limitations in the third quarter of 2017. Also, $0.1 million in the third quarter and $0.5 million in the first nine months of 2017 related to the adoption of ASU 2016-09, Improvements to Employee Share-based Payment Accounting.
The Company recorded discrete items in the first nine months of 2016, resulting in a net tax benefit of $1.0 million, primarily due to international tax planning initiatives.
Income tax expense in the third quarter and first nine months of both 2017 and 20162021 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,credits and the foreign derived intangible income deduction. The effective tax rate for the first six months of 2022 included a net discrete income tax benefit of $0.4 million, primarily related to excess tax benefits and other items.from stock-based compensation awards. 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.






1015



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


Note G — Earnings Per Share (EPS)

The following table sets forth the computation of basic and diluted EPS:
Second Quarter EndedSix Months Ended
July 1,July 2,July 1,July 2,
(Thousands, except per share amounts)2022202120222021
Numerator for basic and diluted EPS:
Net income$23,255 $17,868 $37,274 $34,635 
Denominator:
Denominator for basic EPS:
Weighted-average shares outstanding20,517 20,429 20,491 20,402 
Effect of dilutive securities:
Stock appreciation rights81 79 86 75 
Restricted stock units82 93 116 108 
Performance-based restricted stock units43 50 50 62 
Diluted potential common shares206 222 252 245 
Denominator for diluted EPS:
Adjusted weighted-average shares outstanding20,723 20,651 20,743 20,647 
Basic EPS$1.13 $0.87 $1.82 $1.70 
Diluted EPS$1.12 $0.87 $1.80 $1.68 
  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 219,292119,744 and 982,58852,709 for the quarters ended September 29, 2017July 1, 2022 and September 30, 2016,July 2, 2021, respectively, and 370,91779,949 and 993,41864,478 for the ninesix months ended September 29, 2017July 1, 2022 and September 30, 2016, respectively,July 2, 2021, respectively. These securities are primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices greater than the average market price of the Company's common shares and were excluded from the dilution calculation as theirthe effect would have been anti-dilutive.


Note H — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:
 Sept. 29, Dec. 31,July 1,December 31,
(Thousands) 2017 2016(Thousands)20222021
Raw materials and supplies $44,924
 $36,233
Raw materials and supplies$115,970 $93,518 
Work in process 181,553
 169,327
Work in process253,012 221,638 
Finished goods 37,671
 38,147
Finished goods53,394 45,959 
Subtotal $264,148
 $243,707
Less: LIFO reserve balance 43,925
 42,842
Inventories $220,223
 $200,865
Inventories, netInventories, net$422,376 $361,115 
The liquidationCompany maintains the majority of lastthe precious metals and copper used in first out (LIFO) inventory layers did not impact costproduction on a consignment basis in order to reduce its exposure to metal market price movements and to reduce its working capital investment. The notional value of sales in the third quarteroff-balance sheet precious metals and copper was $415.0 million and $480.2 million as of 2017 or 2016. In the first nine 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.July 1, 2022 and December 31, 2021, respectively.



16


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note I — Customer Prepayments

In 2020, the Company entered into an investment agreement and a master supply agreement with a customer to procure equipment to manufacture product for the customer. The customer provided prepayments to the Company to fund the necessary infrastructure improvements and procure the equipment necessary to supply the customer with the desired product. The Company owns, operates and maintains the equipment that is being used to manufacture product for the customer.

Revenue will be recognized as the Company fulfills purchase orders and ships the commercial product to the customer, as product delivery is considered the satisfaction of the performance obligation.

Additionally, during the second quarter of 2022, the Company entered into an amendment to the investment agreement with the same customer to procure additional equipment to manufacture product for the customer. As of July 1, 2022, the Company has received approximately $13.1 million in prepayments under the terms of this agreement.

As of July 1, 2022 and December 31, 2021, $84.6 million and $72.6 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheets. The prepayments will remain in Unearned income until commercial purchase orders are received for product serviced out of the equipment, at which time a portion of the purchase order value related to prepayments will be reclassified to Unearned revenue. As of July 1, 2022 $1.0 million of the prepayments are classified as Unearned revenue.

Note J — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the thirdsecond quarter and first ninesix months of 2017ended July 1, 2022 and 2016July 2, 2021, respectively, for the domestic pension plans (which include theas shown below. The Pension Benefits column aggregates defined benefit pension planplans in the U.S., Germany, Liechtenstein, England, and the U.S. supplemental retirement plans) andplans. The Other Benefits column includes the domestic retiree medical and life insurance plan.

 Pension BenefitsOther Benefits
 Second Quarter EndedSecond Quarter Ended
July 1,July 2,July 1,July 2,
(Thousands)2022202120222021
Components of net periodic benefit (credit) cost
Service cost$292 $436 $20 $20 
Interest cost1,213 1,048 39 29 
Expected return on plan assets(2,378)(2,474) — 
Amortization of prior service (benefit) cost(18)(21)(374)(374)
Amortization of net loss (gain)420 577 (68)(69)
Net periodic benefit (credit) cost$(471)$(434)$(383)$(394)
Settlements —  — 
Total net benefit (credit) cost$(471)$(434)$(383)$(394)




1117



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


 Pension BenefitsOther Benefits
 Six Months EndedSix Months Ended
July 1,July 2,July 1,July 2,
(Thousands)2022202120222021
Components of net periodic benefit (credit) cost
Service cost$610 $874 $42 $40 
Interest cost2,436 2,096 78 58 
Expected return on plan assets(4,778)(4,948) — 
Amortization of prior service (benefit) cost(38)(42)(748)(748)
Amortization of net loss (gain)850 1,154 (136)(138)
Net periodic benefit (credit) cost$(920)$(866)$(764)$(788)
Settlements —  — 
Total net benefit (credit) cost$(920)$(866)$(764)$(788)

 
Pension Benefits
Other Benefits
 
Third Quarter Ended
Third Quarter Ended


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







Service cost
$2,106

$1,946

$23

$26
Interest cost
2,372

2,595

99

140
Expected return on plan assets
(3,678)
(3,488)



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)

The Company madedid not make any contributions to theits domestic defined benefit pension plan of $8.0 million and $12.0 million in the second quarter or first ninesix months of 2017 and 2016, respectively.2022 or 2021.
Beginning in 2017, theThe Company has elected to use a spot-rate approach to estimatereports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and interestthe non-service cost components of net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation. Historically, the Company used a weighted-average approachOther non-operating (income) expense.































18


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 JK — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the thirdsecond quarter and first ninesix months of 20172022 and 20162021 are as follows:
Gains and Losses on Cash Flow Hedges
(Thousands)Foreign CurrencyInterest RatePrecious MetalsCopperTotalPension and Post-Employment BenefitsForeign Currency TranslationTotal
Balance at April 1, 2022$2,451 $2,485 $(246)$— $4,690 $(39,942)$(4,934)$(40,186)
Other comprehensive income (loss) before reclassifications1,117 756 467 — 2,340 — (6,343)(4,003)
Amounts reclassified from accumulated other comprehensive income (loss)(110)238 (8)— 120 (10)— 110 
Net current period other comprehensive (loss) income before tax1,007 994 459 — 2,460 (10)(6,343)(3,893)
Deferred taxes232 229 105 — 566 (26)— 540 
Net current period other comprehensive (loss) income after tax775 765 354 — 1,894 16 (6,343)(4,433)
Balance at July 1, 2022$3,226 $3,250 $108 $— $6,584 $(39,926)$(11,277)$(44,619)
Balance at April 2, 2021$1,462 $— $320 $280 $2,062 $(43,309)$(4,840)$(46,087)
Other comprehensive (loss) income before reclassifications183 — (239)1,145 1,089 — 3,193 4,282 
Amounts reclassified from accumulated other comprehensive income (loss)— — 65 (1,507)(1,442)77 — (1,365)
Net current period other comprehensive (loss) income before tax183 — (174)(362)(353)77 3,193 2,917 
Deferred taxes42 0(40)(82)(80)(6)— (86)
Net current period other comprehensive (loss) income after tax141 — (134)(280)(273)83 3,193 3,003 
Balance at July 2, 2021$1,603 $— $186 $— $1,789 $(43,226)$(1,647)$(43,084)
  Gains and Losses on Cash Flow Hedges      
(Thousands) Foreign Currency Precious Metals Total Pension and Post-Employment Benefits Foreign Currency Translation Total
Balance at June 30, 2017
$1,109

$93

$1,202

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


271

(258)
Amounts reclassified from accumulated other comprehensive income
433

(94)
339

1,345



1,684






1219



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)



13


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


Gains and Losses on Cash Flow Hedges
(Thousands)Foreign CurrencyInterest RatePrecious MetalsCopperTotalPension and Post-Employment BenefitsForeign Currency TranslationTotal
Balance at December 31, 2021$2,348 $— $72 $— $2,420 $(39,702)$(2,887)$(40,169)
Other comprehensive income (loss) before reclassifications1,270 3,868 (53)— 5,085 — (8,390)(3,305)
Amounts reclassified from accumulated other comprehensive income (loss)(130)353 99 — 322 (1,011)— (689)
Net current period other comprehensive (loss) income before tax1,140 4,221 46 — 5,407 (1,011)(8,390)(3,994)
Deferred taxes262 971 10 — 1,243 (787)— 456 
Net current period other comprehensive (loss) income after tax878 3,250 36 — 4,164 (224)(8,390)(4,450)
Balance at July 1, 2022$3,226 $3,250 $108 $— $6,584 $(39,926)$(11,277)$(44,619)
Balance at December 31, 2020$519 $— $(170)$468 $817 $(43,473)$4,017 $(38,639)
Other comprehensive (loss) income before reclassifications1,268 — 502 2,436 4,206 — (5,664)(1,458)
Amounts reclassified from accumulated other comprehensive income (loss)140 — (39)(3,041)(2,940)234 — (2,706)
Net current period other comprehensive (loss) income before tax1,408 — 463 (605)1,266 234 (5,664)(4,164)
Deferred taxes324 — 107 (137)294 (13)— 281 
Net current period other comprehensive (loss) income after tax1,084 — 356 (468)972 247 (5,664)(4,445)
Balance at July 2, 2021$1,603 $— $186 $— $1,789 $(43,226)$(1,647)$(43,084)
Reclassifications from accumulated other comprehensive income (loss) of gains and losses on foreign currency cash flow hedges are recorded in Other-netNet sales in the Consolidated Statements of Income. 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. Reclassifications from accumulated other comprehensive income (loss) of gains and losses on the interest rate cash flow hedge is recorded in Interest expense in the Consolidated Statements of Income. Refer to Note MN for additional details on cash flow hedges.


20


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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 IJ for additional details on pension and post-employment expenses.






1421



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


Note KL — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $1.5$2.0 million and $6.2$3.8 million in the thirdsecond quarter and first ninesix months of 2017,2022, respectively, compared to $2.1$2.2 million and $4.4$3.8 million, respectively, in the same periods of 2016.2021.
The Company granted 97,015 SARs45,016 stock appreciation rights (SARs) to certain employees during the first ninesix months of 2017.2022. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ninesix months ended September 29, 2017July 1, 2022 were $35.26$80.85 and $10.89,$25.87, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:
Risk-free interest rate1.921.56 %
Dividend yield1.10.59 %
Volatility34.038.5 %
Expected term (in years)5.6
4.4

The Company granted 62,18559,599 stock-settled restricted stock units (RSUs) and 32,466 cash-settled RSUs to certain employees and non-employee directors during the first ninesix months of 2017.2022. 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$80.87 for stock-settled RSUs granted to employees during the ninesix months ended September 29, 2017. Cash-settledJuly 1, 2022. RSUs are accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stockgenerally expensed over the vesting period of three years.years for employees.
The Company granted stock-settled and cash-settled performance-based restricted stock units (PRSUs) to certain employees in the first ninesix months of 2017.2022. The weighted-average fair value of the stock-settled PRSUs was $30.28$97.79 per share and will be expensed over the vesting period of three years. The liability for cash-settled PRSUs is re-measured at fair value each reporting period, and the adjustment to income is recorded accordingly. The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and theits total return to shareholders over the vesting period relative to a peer group’s performance over the same period.
At September 29, 2017, unearnedJuly 1, 2022, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $5.3$15.2 million, and is expected to be recognized over the remaining vesting period of the respective grants.


Note LM — 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.





22
15



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


The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of September 29, 2017July 1, 2022 and December 31, 2016:2021:
          
(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 SheetsQuoted 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 201620222021202220212022202120222021
Financial Assets                Financial Assets
Deferred compensation investments $2,149
 $1,734
 $2,149
 $1,734
 $
 $
 $
 $
Deferred compensation investments$2,899 $4,426 $2,899 $4,426 $ $— $ $— 
Foreign currency forward contracts 149
 691
 
 
 149
 691
 
 
Foreign currency forward contracts2,942 3,368  — 2,942 3,368  — 
Interest rate swapInterest rate swap4,221 —  — 4,221 —  — 
Precious metal swaps 45
 
 
 
 45
 
 
 
Precious metal swaps214 116  — 214 116  — 
Total $2,343
 $2,425
 $2,149
 $1,734
 $194
 $691

$

$
Total$10,276 $7,910 $2,899 $4,426 $7,377 $3,484 $ $— 
Financial Liabilities                Financial Liabilities
Deferred compensation liability $2,149
 $1,734
 $2,149
 $1,734
 $
 $
 $
 $
Deferred compensation liability$2,899 $4,426 $2,899 $4,426 $ $— $ $— 
Foreign currency forward contracts 669
 1
 
 
 669
 1
 
 
Foreign currency forward contracts627 136  — 627 136  — 
Precious metal swaps 197
 
 
 
 197
 
 
 
Precious metal swaps76 24 — — 76 24 — — 
Total $3,015
 $1,735
 $2,149
 $1,734
 $866
 $1
 $
 $
Total$3,602 $4,586 $2,899 $4,426 $703 $160 $ $— 
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, metals, and metals.interest rates. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of September 29, 2017July 1, 2022 and December 31, 2016.2021. 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 MN — Derivative Instruments and Hedging Activity

The Company uses derivative contracts to hedge portions of itsexposure to movements in interest rates associated with borrowings, 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:
Interest Rate. On March 4, 2022, the Company entered into a $100.0 million interest rate swap to hedge the interest rate risk on the Credit Agreement described in Note P. The swap hedges the change in 1-month LIBOR from March 4, 2022 to November 2, 2026. The purpose of this hedge is to manage the risk of changes in the monthly interest payments attributable to changes in the benchmark interest rate.
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


23


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.
The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and nature of 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



16


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 product containing precious metal product is fabricated and ready for shipmentdelivered to the customer, the metal content is purchased out of consignment atbased on the current market price. The price paid by the Company for the precious metal forms the basis for the price charged to the customer.customer for the metal content in the product. 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 feeconsignment fees based upon the current value of the metal as it fluctuates while on hand.consignment. Each financial institution retains title to its consigned precious metal until it is purchased by the Company, and it is the Company’s typical practice to purchase metal out of consignment only after a product containing that metal has been purchased by one of our customers.
In certain instances, a customer may want to establishfix 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 out of consignment 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 refined and 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 that 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.exposure in these instances.
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 infrequent and, when made 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 usedpaid when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.owned by the Company.
The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held untilto maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses currency hedge contracts that are denominated in the same currency as the underlying exposure and precious metal hedge contracts denominated in the sameor metal as the underlying exposure.


24


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
All derivatives are recorded on the balance sheet at fair value. If thea 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) untiland reclassified into income in the same period or periods during which the hedged item is recognized intransaction affects earnings. The ineffective portion of a derivative’sderivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also bederivative assets and liabilities are classified as short-term or long-term depending upon theirthe contract maturity dates.








17


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


date.
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 the balance sheet classification as of September 29, 2017July 1, 2022 and December 31, 2016:2021:
 September 29, 2017 December 31, 2016 July 1, 2022December 31, 2021
(Thousands) 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
(Thousands)Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Foreign currency forward contractsForeign currency forward contracts
Prepaid and other current assetsPrepaid and other current assets$14,020 $533 $55,063 $2,132 
Other liabilities and accrued items        Other liabilities and accrued items13,466 587 9,425 128 
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 less than $0.1 million of foreign currency losses relatingin the second quarter of 2022 and $0.7 million of foreign currency gains related to these derivatives in the first six months of $0.52022, compared to $0.4 million of foreign currency losses and $1.1$1.2 million duringof foreign currency gains in the thirdsecond quarter and first ninesix months of 2017,2021, respectively.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of September 29, 2017July 1, 2022 and December 31, 2016:2021:
July 1, 2022
Fair Value
(Thousands)Notional
Amount
Prepaid and other current assetsOther assetsOther liabilities and accrued itemsOther long-term liabilities
Foreign currency forward contracts - yen$4,091 $453 $34 $40 $ 
Foreign currency forward contracts - euro31,827 1,827 95   
Precious metal swaps6,802 199 15 76  
Interest rate swap100,000 1,329 2,892   
Total$142,720 $3,808 $3,036 $116 $ 
December 31, 2021
Fair Value
Notional
Amount
Prepaid and other current assetsOther assetsOther liabilities and accrued itemsOther long-term liabilities
Foreign currency forward contracts - yen$3,907 $131 $$— $— 
Foreign currency forward contracts - euro28,412 1,102 — — 
Precious metal swaps6,256 116 — 24 — 
Total$38,575 $1,349 $$24 $



25

  September 29, 2017 December 31, 2016
(Thousands) 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Prepaid expenses        
Foreign currency forward contracts - yen $2,000
 $59
 $2,418
 $239
Foreign currency forward contracts - euro 6,829
 90
 6,493
 452
Precious metal swaps 2,148
 13
 
 
Total 10,977
 162
 8,911
 691
         
Other assets        
Precious metal swaps 1,932
 32
 
 
Total 1,932
 32
 
 
         
Other liabilities and accrued items        
Foreign currency forward contracts - euro 12,689
 (658) 537
 (1)
Precious metal swaps 7,845
 (170) 
 
Total 20,534
 (828) 537
 (1)
         
Other long-term liabilities        
Precious metal swaps 1,999
 (27) 
 
Total $35,442
 $(661) $9,448
 $690

Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
All of thesethe contracts summarized above were designated and effective as cash flow hedges. No ineffectiveness expense was recordedWe expect to reclassify $3.7 million of net gains into earnings in the third quarter or first ninenext 12 months contemporaneously with the earnings effects of 2017 or 2016.the related forecasted transactions. At July 1, 2022, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years. Refer to Note K for further details related to OCI.
Changes inThe following table summarizes the fair value ofamounts reclassified from accumulated other comprehensive income relating to the Company’s outstanding derivatives designated as cash flow hedges recorded in OCI forand associated income statement classification as of the second quarter and first ninesix months of 20172022 and 2016 totaled decreases of $1.2 million and $1.6 million, respectively. The Company expects to relieve substantially the entire balance in OCI as of September 29, 2017 to the Consolidated Statements of Income within the next 18-month period. Refer to Note J for additional OCI details.2021: 
Second Quarter Ended
(Thousands)July 1, 2022July 2, 2021
Hedging relationshipLine item
Foreign currency forward contractsNet sales$(110)$— 
Precious metal swapsCost of sales(8)65 
Interest rate swapInterest expense - net238 — 
Copper swapsCost of sales (1,507)
Total$120 $(1,442)
Six Months Ended
(Thousands)July 1, 2022July 2, 2021
Hedging relationshipLine item
Foreign currency forward contractsNet sales$(130)$140 
Precious metal swapsCost of sales99 (39)
Interest rate swapInterest expense - net353 — 
Copper swapsCost of sales (3,041)
Total$322 $(2,940)

Note NO — Contingencies

Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims,, refer to Note Q ("ContingenciesT "Contingencies and Commitments") in the Company's 20162021 Annual Report on Form 10-K.
NaN beryllium case was outstanding as of July 1, 2022. The Company does not expect the resolution of this open matter to have a material impact on the consolidated financial statements. As previously reported, a settlement agreement had been reached in one case, and the case was dismissed during the second quarter.
Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be



18


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


reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.


26


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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. Plaintiff filed a motion for conditional certification, which the Company opposed.The motion has been fully briefed, and the parties are awaiting a decision from the court. The Company believes that it has substantive defenses and intends to vigorously defend this suit, absent a negotiated resolution.

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$4.3 million and $4.8 million at September 29, 2017July 1, 2022 and $6.0 million at December 31, 2016.2021, 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 P — Debt
(Thousands)July 1, 2022December 31, 2021
Borrowings under Credit Agreement$205,091 $152,296 
Borrowings under the Term Loan Facility292,500 300,000 
Foreign debt4,012 2,252 
Total debt outstanding501,603 454,548 
Current portion of long-term debt(15,333)(15,359)
Gross long-term debt486,270 439,189 
Unamortized deferred financing fees(4,305)(4,801)
Long-term debt$481,965 $434,388 
As of July 1, 2022 and December 31, 2021, the Company had $205.1 million outstanding at an average interest rate of 3.56% and $152.3 million outstanding at an average interest rate of 2.12%, respectively, under its revolving credit facility. The available borrowing capacity under the revolving credit facility as of July 1, 2022 was $124.0 million. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2026. The amended and restated credit agreement governing the revolving credit facility (Credit Agreement) includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of July 1, 2022.

The balance outstanding on the term loan facility as of July 1, 2022 and December 31, 2021 was $292.5 million and $300.0 million, respectively.

At July 1, 2022 and December 31, 2021, there was $46.4 million and $46.3 million, respectively, outstanding against the letters of credit sub-facility.












27



Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications. Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and appliance.telecom and data center.

Coronavirus (COVID-19) Second Quarter 2022 Update
In March 2020, the World Health Organization characterized a novel strain of the coronavirus, known as COVID-19, as a pandemic. The duration of the COVID-19 pandemic and the long-term impacts on the economy are uncertain and could impact the Company’s estimates. Management continues to manage global macroeconomic impacts on supply chains, inflationary costs, and temporary plant shutdowns, labor availability and costs, all of which impacted the Company during the six months of 2022.


28


RESULTS OF OPERATIONS
Third
Second Quarter
 Second Quarter Ended
July 1,July 2,$%
(Thousands, except per share data)20222021ChangeChange
Net sales$445,295 $370,999 $74,296 20 %
Value-added sales277,226 207,887 69,339 33 %
Gross margin87,427 69,581 17,846 26 %
Gross margin as a % of value-added sales32 %33 %
Selling, general, and administrative (SG&A) expense42,047 38,060 3,987 10 %
SG&A expense as a % of value-added sales15 %18 %
Research and development (R&D) expense7,592 6,604 988 15 %
R&D expense as a % of value-added sales3 %%
Restructuring expense — — — %
Other—net5,928 4,194 1,734 41 %
Operating profit31,860 20,723 11,137 54 %
Other non-operating (income)—net(1,168)(1,277)109 (9)%
Interest expense—net4,701 858 3,843 448 %
Income before income taxes28,327 21,142 7,185 34 %
Income tax expense5,072 3,274 1,798 55 %
Net income$23,255 $17,868 $5,387 30 %
Diluted earnings per share$1.12 $0.87 $0.25 29 %
  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




19



Net sales of $294.3$445.3 million in the thirdsecond quarter of 2017 were $44.72022 increased $74.3 million higher than the $249.6from $371.0 million recorded in the thirdsecond quarter of 2016. Net2021. Increased net sales in the Performance Materials and Electronic Materials segments were partially offset by a net sales decrease in the Precision Optics segment. Volume and price increases drove growth in our semiconductor (29%), industrial (26%), telecom (24%), consumer electronic (24%), energy (24%) and defense (23%) end markets when compared to the same period last year. The acquisition of $38.6 million duringHCS-Electronic Materials, which was completed in the thirdfourth quarter of 2017 were attributable2021, accounted for $43.6 million of the net sales increase, most of which are sales into the semiconductor end market. See Note C to the high performance target materials business ofConsolidated Financial Statements for additional details on the Heraeus Group (HTB). Changesyear over year changes in our net sales by segment and market.

The change in precious metal and copper prices negativelyfavorably impacted net sales induring the thirdsecond quarter of 20172022 by approximately $2.4$1.3 million when compared to the third quarter of 2016.prior year.


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 precious metal prices.market 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$277.2 million in the thirdsecond quarter of 20172022 increased $14.4$69.3 million, or 9%33%, compared to the thirdsecond quarter of 2016. Value-added sales from the HTB2021. The acquisition totaled $11.4 millionof HCS-Electronic Materials, which was completed in the thirdfourth quarter of 2017. Value-added2021, accounted for $43.6 million of the increase. The remaining value-added sales increase was driven by increased value-added sales into the energy (43%), semiconductor (23%) and industrial (13%) end markets.

Gross margin in the second quarter of 2022 was $87.4 million, which was up 26% compared to the consumer electronics end market, which accounted for 31% of our total value-added sales during the thirdsecond quarter of 2017, increased $2.9 million from the prior-year period. Also, value-added sales in the industrial components end market increased $4.2 million from the prior-year period. These increases were offset by weakness in the medical end market, which lowered value-added sales by approximately $6.1 million.

Gross margin in the third quarter of 2017 was $55.2 million, or $4.4 million higher than the $50.8 million gross margin recorded during the third quarter of 2016.2021. Gross margin expressed as a percentage of value-added sales wasdecreased to 32% in the thirdsecond quarter of both 20172022 from 33% in the second quarter of 2021. The decrease was driven by higher pre-production costs associated with the production ramp of the new wide area clad facility and 2016.higher costs due to supply chain pressures.


SG&A expense was $36.4$42.0 million in the thirdsecond quarter of 2017, or $2.22022, compared to $38.1 million higher than the $34.2 million recorded in the thirdsecond quarter of 2016.2021. The increase in SG&A expense is attributabledue to $2.1higher HCS-Electronic Materials and Optics Balzers integration cost of $1.0 million, ongoing HCS-Electronic Materials cost of HTB expenses.$2.4 million and increased business support investment and increased travel. Despite the higher cost, SG&A expense as a percentage of value-added sales decreased from 18% to 15% year over year.




29


R&D expense consists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and applications.applications to deliver new high performing advanced materials to our customers. R&D expense was flat as a percentageaccounted for 3% of value-added sales at approximately 2% in the thirdsecond quarter of both 20172022 and 2016.2021.


Other-net was $3.8$5.9 million of expense in the thirdsecond quarter of 2017,2022, or a $0.6$1.7 million increase from the thirdsecond quarter of 2016. Other-net in the third quarter2021, primarily driven $2.1 million of 2017 included higher metal consignment fees of $0.8 million, as comparedincreased intangible asset amortization expense, related to the third quarteracquisition of 2016.HCS-Electronic Materials. 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 J to the Consolidated Financial Statements for details of the components.

Interest expense-net was $0.5$4.7 million and $0.9 million in the thirdsecond quarter of both 20172022 and 2016.2021, respectively. The increase in interest expense is primarily due to increased borrowings under our revolving credit facility and interest owed on our new term loan, the proceeds of which were used to fund the purchase price for the acquisition of HCS-Electronic Materials.


Income tax expensefor the thirdsecond quarter of 20172022 was $1.7$5.1 million, compared to $1.6$3.3 million in the thirdsecond quarter of 2016.2021. The effective tax rate for the thirdsecond quarter of 20172022 and 2021 was 17.9% and 15.5% compared, respectively. The effective tax rate for the second quarter of both 2022 and 2021 was lower than the statutory tax rate primarily due to 16.7% in the prior-year period. The effectsimpact of percentage depletion, the foreign rate differential, the research and development credit, discrete benefits,credits and other items were the primary factors for the difference between the effective and statutory rates in the third quarter of 2017 and 2016. Refer toforeign derived intangible income deduction. See Note F to the Consolidated Financial Statements for further details on income taxes.additional discussion.





20



NineSix Months
 Six Months Ended
July 1,July 2,$%
(Thousands, except per share data)20222021ChangeChange
Net sales$894,340 $725,385 $168,955 23 %
Value-added sales543,994 406,469 137,525 34 %
Gross margin162,718 136,377 26,341 19 %
Gross margin as a % of value-added sales30 %34 %
SG&A expense83,708 74,836 8,872 12 %
SG&A expense as a % of value-added sales15 %18 %
R&D expense14,666 12,810 1,856 14 %
R&D expense as a % of value-added sales3 %%
Restructuring (income) expense1,076 (378)1,454 (385)%
Other—net11,801 8,668 3,133 36 %
Operating profit51,467 40,441 11,026 27 %
Other non-operating (income)—net(2,337)(2,553)216 (8)%
Interest expense—net8,437 1,619 6,818 421 %
Income before income taxes45,367 41,375 3,992 10 %
Income tax expense8,093 6,740 1,353 20 %
Net income$37,274 $34,635 $2,639 %
Diluted earnings per share$1.80 $1.68 $0.12 %
  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$894.3 million in the first ninesix months of 2017 were $95.92022 increased $169.0 million higher than the $734.9from $725.4 million recorded in the first ninesix months of 2016. Changes2021. Increased net sales in the Performance Materials and Electronic Materials segments were partially offset by net sales decrease in the Precision Optics segment. Volume and price increases drove growth in our semiconductor (34%), industrial (37%), telecom (32%) and energy (25%) end markets when compared to the same period last year. The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $86.9 million of the net sales increase, most of which are sales into the semiconductor end market. See Note C to the Consolidated Financial Statements for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper market prices favorably impacted net sales during the first six months of 2022 by $6.5 million compared to prior year.


30



Value-added sales of $544.0 million in the first ninesix months of 2017 by approximately $6.02022 increased $137.5 million, whenor 34%, compared to the first ninesix months of 2016. Net sales2021. The acquisition of HCS-Electronic Materials, which was completed in the Performance Alloysfourth quarter of 2021, accounted for $86.9 million of the increase. The remaining value-added sales increase was driven by increased value-added sales into the energy (52%), industrial (24%), telecom (24%) 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 duringsemiconductor (22%) end markets.

Gross margin in the first ninehalf of 2022 was $162.7 million, which was up 19% compared to the first half of 2021. Gross margin expressed as a percentage of value-added sales decreased to 30% in the first six months of 2017 were attributable to the HTB acquisition. Excluding the HTB acquisition, net sales2022 from 34% in the Advanced Materials segment increased $22.7first six months of 2021. The decrease was primarily driven by $7.5 million due to higher sales volumeof amortization of the inventory step up from the HCS-Electronic Material acquisition made in the consumer electronicsfourth quarter of 2021, and industrial components end markets. These favorable impacts were offset by lower sales volume inpre-production costs associated with the medical end market inset-up of the Precision Coatings segment.new wide area clad facility.


Value-added sales of $496.5SG&A expense was $83.7 million in the first ninesix months of 2017 increased $41.7 million, or 9%2022, compared to the first nine months of 2016. Value-added sales from the HTB acquisition totaled approximately $24.9$74.8 million in the first ninesix months of 2017. Value-added sales2021. The increase in SG&A expense for the first six months of 2022 was driven by $2.8 million of integration costs, $4.9 million of HCS-Electronic Materials ongoing spend and the remainder due to the consumer electronics end market, which accounted for 30%increased business support investment and increased travel. Expressed as a percentage 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 SG&A expense was 15% and 18% in the first nine monthshalf of 2017 was $152.8 million, or $13.4 million higher than the $139.4 million gross margin recorded during the first nine months2022 and 2021, respectively.

R&D expense consists primarily of 2016. Gross margin was 31%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 ninehalf of both 2022 and 2021.

Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first six months of both 20172022, we recorded a combined total of $1.1 million of restructuring charges in our Precision Optics, Electronic Materials and 2016.Other segments.


SG&A expense was $108.1 million inDuring the first ninesix months of 2017, or $11.02021, we substantially completed the closure of our Large Area Coatings business and recorded $0.4 million higherof income related to lower than the $97.1 millionexpected facility closure costs that were 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.2020.


R&D expenseOther-net 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$11.8 million of expense in the first ninesix months of 2017 and 2016, respectively. Other-net in2022, or a $3.1 million increase from the first ninesix months of 2017 included higher metal consignment fees2021, primarily driven $4.1 million of $1.3 million, as comparedincreased intangible asset amortization expense, related to the first nine monthsacquisition of 2016.HCS-Electronic Materials. 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 J to the Consolidated Financial Statements for details of the components.

Interest expense-net was $1.7$8.4 million and $1.6 million in the first ninesix months of 2017, or a $0.32022 and 2021, respectively. The increase in interest expense is primarily due to increased borrowings under our revolving credit facility and interest owed on our new term loan, the proceeds of which were used to fund the purchase price for the acquisition of HCS-Electronic Materials.

Income tax expensefor the first half of 2022 was $8.1 million, increase from $1.4compared to $6.7 million in the first nine monthshalf of 2016 due to higher average debt outstanding.




21



Income2021. The Company's effective tax expenserate for the first ninesix months of 20172022 and 2021 was $3.3 million, compared17.8% and 16.3%, respectively. The effective tax rate for each period in 2022 and 2021 was lower than the statutory tax rate primarily due to $3.1 million in the first nine monthsimpact of 2016. percentage depletion, research and development credits and the foreign derived intangible income deduction. The effective tax rate for the first ninesix months of 2017 was 14.4% compared2022 included a net discrete income tax benefit of $0.4 million, primarily related to anexcess tax benefits from stock-based compensation awards. The effective tax rate of 14.0% in the prior-year period. The effects of percentage depletion, the foreign rate differential, the research and development credit, discrete benefits, and other items were the primary factors for the difference between the effective and statutory rates in the first ninesix months of 2017 and 2016. Refer2021 included a net discrete income tax expense of $0.5 million, primarily related to Note F to the Consolidated Financial Statements for further details on income taxes.excess tax benefits from stock-based compensation awards.















2231





Value-Added Sales - Reconciliation of Non-GAAP Financial Measure
A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the second quarter and first ninesix months of 20172022 and 20162021 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 EndedSix Months Ended
July 1,July 2,July 1,July 2,
(Thousands)2022202120222021
Net sales
Performance Materials$154,889 $125,294 $304,520 $239,437 
Electronic Materials260,971 213,114 531,807 417,758 
Precision Optics29,435 32,591 58,013 68,190 
Other —  — 
Total$445,295 $370,999 $894,340 $725,385 
Less: pass-through metal costs
Performance Materials$20,923 $16,696 $41,436 $30,007 
Electronic Materials146,779 146,214 307,738 287,909 
Precision Optics18 67 43 
Other349 193 1,105 957 
Total$168,069 $163,112 $350,346 $318,916 
Value-added sales
Performance Materials$133,966 $108,598 $263,084 $209,430 
Electronic Materials114,192 66,900 224,069 129,849 
Precision Optics29,417 32,582 57,946 68,147 
Other(349)(193)(1,105)(957)
Total$277,226 $207,887 $543,994 $406,469 
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 precious metal market 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 market 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 market 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.

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.







2332





Segment Results
The Company consists of four reportable segments: Performance Alloys and Composites, AdvancedMaterials, Electronic Materials, Precision Coatings,Optics, and Other. The Other reportable segment includes unallocated corporate costs.

Performance Alloys and CompositesMaterials
ThirdSecond Quarter
 Third Quarter Ended Second Quarter Ended
 Sept. 29, Sept. 30, $ %July 1,July 2,$%
(Thousands) 2017 2016 Change Change(Thousands)20222021ChangeChange
Net sales $109,393
 $103,699
 $5,694
 5%Net sales$154,889 $125,294 $29,595 24 %
Value-added sales 90,637
 87,247
 3,390
 4%Value-added sales133,966 108,598 25,368 23 %
Operating profit 6,786
 4,357
 2,429
 56%
EBITDAEBITDA27,229 22,318 4,911 22 %
Net sales from the Performance Alloys and CompositesMaterials segment of $109.4$154.9 million in the thirdsecond quarter of 2017 were 5% higher than2022 increased 24% compared to net sales of $103.7$125.3 million in the thirdsecond quarter of 20162021. The increase in sales was primarily due to higher sales volume related to thein energy, industrial components, consumer electronics, and automotive electronics endaerospace markets. In addition, sales attributable to the impact of higher pass-through metal prices favorably impacted netHCS-Electronic Materials acquisition increased sales in this segment by approximately $1.8$7.9 million.
Value-added sales of $90.6$134.0 million in the thirdsecond quarter of 20172022 were 4%23% higher than value-added sales of $87.2$108.6 million in the thirdsecond quarter of 2016.2021. The increase in value-added sales was driven by stronger demanddue to the same factors driving the increase 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 hydroxidenet sales.
EBITDA for the Performance Alloys and Composites generated operating profit of $6.8Materials segment was $27.2 million in the thirdsecond quarter of 20172022 compared to $4.4$22.3 million in the thirdsecond quarter of 2016.2021. The increase in operating profitEBITDA was primarily due to higherthe same factors driving the increase in net sales, volume, favorable product mix,partially offset by $4.6 million of incremental start up costs for the new facility and productivity improvements.manufacturing inefficiencies.

Six Months
Nine Months
 Nine Months Ended Six Months Ended
 Sept. 29, Sept. 30, $ %July 1,July 2,$%
(Thousands) 2017 2016 Change Change(Thousands)20222021ChangeChange
Net sales $310,487
 $292,024
 $18,463
 6%Net sales$304,520 $239,437 $65,083 27 %
Value-added sales 262,534
 248,799
 13,735
 6%Value-added sales263,084 209,430 53,654 26 %
Operating profit 12,523
 6,103
 6,420
 105%
EBITDAEBITDA52,021 39,110 12,911 33 %
Net sales from the Performance Alloys and CompositesMaterials segment of $310.5$304.5 million in the first ninesix months of 2017 were 6% higher than2022 increased 27% compared to net sales of $292.0$239.4 million in the first ninesix months of 2016 primarily2021. The increase in sales was due to increased demandhigher volume in the industrial, componentsdefense and consumer electronicsenergy end markets. The impactIn addition, sales from HCS-Electronic Materials increased sales in this segment by $14.6 million. These impacts were slightly offset by a sale to a defense customer in 2021 that did not repeat in 2022 and a slight decrease in automotive market sales as a result of higher pass-through metal prices favorably impacted net sales by approximately $5.9 million.the global chip shortage impacting the timing of demand.
Value-added sales of $262.5$263.1 million in the first ninesix months of 2017 were 6% higher than value-added sales of $248.8 million in the first nine 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.
Performance Alloys and Composites generated operating profit of $12.5 million in the first nine months of 2017 compared to $6.1 million in the first nine months of 2016. The increase in operating profit was primarily due to higher sales volume, favorable product mix, and productivity improvements.




24



Advanced Materials
Third Quarter
 
Third Quarter Ended


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

$107,250
 50,520
 47%
Value-added sales
60,391

45,960
 14,431
 31%
Operating profit
9,756

8,245
 1,511
 18%
Net sales from the Advanced Materials segment of $157.8 million in the third quarter of 2017 were 47% higher than net sales of $107.3 million in the third quarter of 2016 due to higher 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 the impact of lower pass-through metal prices of $4.7 million.
Value-added sales of $60.4 million in the third quarter of 2017 were 31% higher than value-added sales of $46.0 million in the third quarter of 2016. This increase included value-added sales of $11.4 million attributable to our HTB acquisition. Also, the increase in value-added sales was driven by higher value-added sales to the consumer electronics end market of $2.2 million due primarily to higher demand.
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 quarter of 2016. Operating profit in the third quarter of 2017 was favorably impacted by higher sales volume.

Nine Months
  Nine Months Ended
  Sept. 29, Sept. 30, $ %
(Thousands) 2017 2016 Change Change
Net sales $429,550
 $328,927
 100,623
 31%
Value-added sales 169,720
 135,019
 34,701
 26%
Operating profit 24,873
 20,748
 4,125
 20%
Net sales from the Advanced Materials segment of $429.6 million in the first nine months of 2017 were 31% higher than net sales of $328.9 million in the first nine months of 2016. Net sales of $77.9 million during the first nine months of 2017 were attributable to the HTB acquisition. Also, net sales increased due to a combination of new product sales growth and demand in the consumer electronics and defense end markets.
Value-added sales of $169.7 million in the first nine months of 20172022 were 26% higher than value-added sales of $135.0$209.4 million in the first ninesix months of 2016. This increase included value-added sales of $24.9 million attributable to our HTB acquisition.2021. The increase in value-added sales was also driven by higher value-added salesdue to the consumer electronics end market. Value-added sales tosame factors driving the consumer electronics end market, which represents approximately 49% of total segment value-added sales, increased $7.2 million due primarily to higher demand, excludingincrease in net sales.
EBITDA for the HTB acquisition.
The AdvancedPerformance Materials segment generated operating profit of $24.9was $52.0 million in the first ninesix months of 20172022 compared to $20.7$39.1 million in the first ninesix months of 2016. As a percentage2021. The increase in EBITDA was primarily due to the same factors driving the increase in net sales, partially offset by acquisition costs of $2.7 million, primarily related to purchase accounting inventory step up charges, as well as $8.2 million of incremental start up costs for the new facility and manufacturing inefficiencies.


33



Electronic Materials
Second Quarter
 Second Quarter Ended
July 1,July 2,$%
(Thousands)20222021ChangeChange
Net sales$260,971 $213,114 47,857 22 %
Value-added sales114,192 66,900 47,292 71 %
EBITDA22,337 10,412 11,925 115 %
Net sales from the Electronic Materials segment of $261.0 million in the second quarter of 2022 were 22% higher than net sales of $213.1 million in the second quarter of 2021. The increase in net sales was primarily due to $35.7 million in net sales from the HCS-Electronic Materials acquisition and higher organic sales volumes in the semiconductor, energy and industrial markets. Increase in sales were partially offset by $0.7 million due to lower pass-through metal market prices.
Value-added sales of $114.2 million in the second quarter of 2022 increased 71% compared to value-added sales operating profitof $66.9 million in the second quarter of 2021. The increase was 15%primarily driven by $35.7 million in value-added sales from the HCS-Electronic Materials acquisition as well as higher organic sales volumes into the semiconductor, industrial, energy and other markets.
EBITDA for the Performance Materials segment was $22.3 million in the second quarter of 2022 compared to $10.4 million in the second quarter of 2021. The increase in EBITDA is due to increased sales volumes, partially offset by increases in SG&A expense, mainly driven by R&D expense as the business continues to invest in developing future customer solutions.

Six Months
 Six Months Ended
July 1,July 2,$%
(Thousands)20222021ChangeChange
Net sales$531,807 $417,758 114,049 27 %
Value-added sales224,069 129,849 94,220 73 %
EBITDA34,484 21,342 13,142 62 %
Net sales from the Electronic Materials segment of $531.8 million in the first ninesix months of both 2017 and 2016. Operating profit2022 were 27% higher than net sales of $417.8 million in the first ninesix months of 20172021. The increase in net sales was favorably impactedprimarily due to $72.3 million from the HCS-Electronic Materials acquisition and higher organic sales volumes in the semiconductor, industrial, energy and other markets, as well as the sales impact of higher pass-through metal prices of $1.4 million.
Value-added sales of $224.1 million in the first half of 2022 increased 73% compared to value-added sales of $129.8 million in the first half of 2021. The increase was primarily driven by $72.3 million in value-added sales from the HCS-Electronic Materials acquisition as well as higher organic sales volume.volumes into the semiconductor, industrial, energy and other markets.

EBITDA for the Electronic Materials segment was $34.5 million in the first six months of 2022 compared to $21.3 million in the first six months of 2021. The increase in EBITDA is due to increased sales volumes, partially offset by the amortization of the HCS-Electronic Material inventory step up of $5.0 million.






2534




Precision CoatingsOptics
ThirdSecond Quarter
(Thousands)
Third Quarter Ended(Thousands)Second Quarter Ended
Sept. 29,
Sept. 30, $ %July 1,July 2,$%
2017
2016 Change Change20222021ChangeChange
Net sales
$27,105

$38,670
 (11,565) (30)%Net sales$29,435 $32,591 (3,156)(10)%
Value-added sales
21,896

25,803
 (3,907) (15)%Value-added sales29,417 32,582 (3,165)(10)%
Operating profit
1,613

3,432
 (1,819) (53)%
EBITDAEBITDA3,544 5,547 (2,003)(36)%
Net sales from the Precision CoatingsOptics segment of $27.1$29.4 million in the thirdsecond quarter of 2017 were 30% lower than2022 decreased 10% compared to net sales of $38.7$32.6 million in the thirdsecond quarter of 20162021. The change was primarily driven by a reduction in sales related to COVID-19 PCR testing programs, the discontinuation of a consumer electronic application, foreign currency headwinds and the temporary government-mandated shut down of our Shanghai facility due to lower sales volume.COVID-19.
Value-added sales of $21.9$29.4 million in the thirdsecond quarter of 2017 were 15% lower than2022 decreased 10% compared to value-added sales of $25.8$32.6 million in the thirdsecond quarter of 2016.2021. The defense and industrial components end markets increased $1.3 million primarilydecrease in value-added sales was due to end market demand. This increasethe same factors driving the decrease in net sales.
EBITDA for the Precision Optics segment was more than offset by a decrease of $4.9$3.5 million in the medical end market duesecond quarter of 2022 compared 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$5.5 million in the thirdsecond quarter of 2017, compared to an operating profit of $3.4 million in the third quarter of 2016.2021. The decrease in operating profitEBITDA was driven by lower sales volumedecreased volumes, the temporary shut down of the Shanghai facility, and $0.4 million of cost reduction initiatives, primarily severance, associated with reducing headcount in Asia and North America.related unabsorbed costs.
Nine
Six Months
(Thousands) Nine Months Ended(Thousands)Six Months Ended
Sept. 29, Sept. 30, $ %July 1,July 2,$%
2017 2016 Change Change20222021ChangeChange
Net sales $90,742
 $113,955
 (23,213) (20)%Net sales$58,013 $68,190 (10,177)(15)%
Value-added sales 67,810
 75,548
 (7,738) (10)%Value-added sales57,946 68,147 (10,201)(15)%
Operating profit 6,145
 9,803
 (3,658) (37)%
EBITDAEBITDA5,735 13,018 (7,283)(56)%
Net sales from the Precision CoatingsOptics segment of $90.7$58.0 million in the first nine monthshalf of 2017 were 20% lower than2022 decreased 15% compared to net sales of $114.0$68.2 million in the first nine monthshalf of 20162021. The change was primarily driven by a reduction in sales related to COVID-19 PCR testing programs, the discontinuation of a consumer electronic application, foreign currency headwinds and the temporary government-mandated shut down of our Shanghai facility due to lower sales volume.COVID-19.
Value-added sales of $67.8$57.9 million in the first nine monthshalf of 2017 were 10% lower than2022 decreased 15% compared to value-added sales of $75.5$68.1 million in the first nine monthshalf of 2016.2021. The defense and industrial components end markets increased $3.6 million primarilydecrease in value-added sales was due to stronger end market demand. This increasethe same factors driving the decrease in net sales.
EBITDA for the Precision Optics segment 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.
The Precision Coatings segment generated operating profit of $6.1$5.7 million in the first ninesix months of 20172022 compared to $9.8$13.0 million in the first ninesix months of 2016.2021. The decrease in operating profit inEBITDA was driven by decreased volumes, the first nine monthstemporary shut down of 2017 versus the comparable period of 2016 was due to lower sales volume, cost reduction initiatives of $0.4 million,Shanghai facility, related unabsorbed costs and the absence of a gain on the sale of equipment of $0.8 million realizedrestructuring charges incurred during the first ninesix months of 2016.2022.



26




Other
ThirdSecond Quarter
(Thousands) Third Quarter Ended(Thousands)Second Quarter Ended
Sept. 29, Sept. 30, $ %July 1,July 2,$%
2017 2016 Change Change20222021ChangeChange
Net sales $
 $
 
  %Net sales$ $— — — %
Value-added sales (1,542) (2,009) 467
 (23)%Value-added sales(349)(193)(156)81 %
Operating loss (6,597) (5,883) (714) 12 %
EBITDAEBITDA(7,191)(5,813)(1,378)24 %
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs of $6.6were $7.2 million in the thirdsecond quarter of 2017 increased $0.7 million as2022 compared to $5.9$5.8 million in the thirdsecond quarter of 2016.2021. Corporate costs were 4%accounted for 3% of total CompanyCompany-wide value-added sales in the thirdsecond quarter of both 20172022 and 2016.2021. The


35


increase in corporate costs in the second quarter of 2022 compared to the second quarter of 2021 is primarily related to increased employee related costs due to business support investments and HCS-Electronic Materials integration costs.

Six Months
(Thousands)Six Months Ended
July 1,July 2,$%
20222021ChangeChange
Net sales$ $— — — %
Value-added sales(1,105)(957)(148)15 %
EBITDA(12,366)(11,413)(953)%
Corporate costs were $12.4 million in the first half of 2022 compared to $11.4 million in the first half of 2021. Corporate costs accounted for 2% and 3% of Company-wide value-added sales in the first half of 2022 and 2021, respectively. The increase in corporate costs was primarily due to higher incentive compensation expense associated with value-added sales and profit growth.

Nine Months
(Thousands) Nine Months Ended
 Sept. 29, Sept. 30, $ %
 2017 2016 Change Change
Net sales $
 $
 
  %
Value-added sales (3,602) (4,573) 971
 (21)%
Operating loss (18,829) (13,194) (5,635) 43 %
Corporate costs of $18.8 million in the first nine monthshalf of 2017 increased $5.6 million as2022 compared to $13.2 million in the first nine monthshalf of 2016. As a percent of total Company value-added sales, corporate2021 is primarily related to HCS-Electronic Material integration costs and increased to 4% in the first nine months of 2017 from 3% in the prior-year. The increase in corporate costs was due to higher incentive compensation and stock-based compensation expense of $5.5 million, which included $1.4 million due to accelerated stock compensation expense associated with the transition of the Company's CEO.business support investments.


36


FINANCIAL POSITION
Cash Flow
A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows:
 Six Months Ended
July 1,July 2,$
(Thousands)20222021Change
Net cash provided by operating activities$21,415 $44,065 $(22,650)
Net cash used in investing activities(40,596)(57,109)16,513 
Net cash provided by financing activities38,418 11,522 26,896 
Effects of exchange rate changes(1,524)(11)(1,513)
Net change in cash and cash equivalents$17,713 $(1,533)$19,246 
  Nine Months Ended
  Sept. 29, Sept. 30, $
(Thousands) 2017 2016 Change
Net cash provided by operating activities $35,497
 $27,222
 $8,275
Net cash used in investing activities (34,830) (27,620) (7,210)
Net cash used in financing activities (10,938) (8,556) (2,382)
Effects of exchange rate changes 1,293
 524
 769
Net change in cash and cash equivalents $(8,978) $(8,430) $(548)
Net cash provided by operating activitiestotaled $35.5$21.4 million in the first ninesix months of 20172022 versus $27.2$44.1 million in the comparable prior-year period. WorkingThe decrease in operating cash flow was primarily due to cash used to fund higher working capital requirements used cash of $13.5 million duringdue to higher inventory to support increasing demand and sales and higher incentive compensation paid out in the first nine monthsquarter, partially offset by a higher net income and an increase in unearned income due to customer prepayments of 2017 compared to a use of $18.7$13.1 million received in the second quarter.
Net cash used in investing activities was $40.6 million in the first ninesix months of 2016. Cash flows used for accounts receivable were $1.8 million higher than the prior year-period due to the HTB acquisition. Our three-month trailing days sales outstanding (DSO) was approximately 40 days at September 29, 2017 versus 41 days at December 31, 2016. Cash flows used for inventory increased $13.2 million primarily within the Performance Alloys and Composites and Advanced Materials segments to respond to anticipated orders and demand. Cash flows from accounts payable and accrued expenses provided cash of approximately $18.0 million2022 compared to a use of $2.2$57.1 million in the prior-year period primarily due to a higher accounts payable balance duedecrease in capital expenditures primarily related to investments in new equipment funded by customer prepayments in 2021. See Note I to the timingConsolidated Financial Statements for additional discussion. Additionally, the Company paid a working capital true-up of payments andapproximately $3.0 million during the HTBsecond quarter of 2022 related to the HCS-Electronic Materials acquisition.



27



Net cash used in investing activities was $34.8 million in See Note B to the first nine months of 2017 compared to $27.6 million in the prior-year period, reflecting a $16.5 million paymentConsolidated Financial Statements for the HTB acquisition offset by lower payments for property, plant, and equipment and mine development of $10.6 million.additional discussion.
Capital expenditures are made primarily driven by customer partnerships like the precision clad strip project and investments within our HCS-Electronic Materials acquisition as well as infrastructure for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2017,2022, the Company expects payments for property, plant, and equipment to be less than $30.0 million and mine development expenditures to be less than $3.0approximately $100 million.
Net cash used inprovided by financing activities totaled $10.9$38.4 million in the first ninesix months of 2017 versus $8.62022 and $11.5 million in the comparable prior-year periodperiod. The increase is primarily due to a higher amountincreased net borrowings of common shares withheld for taxes$52.8 million under our revolving credit facility in 2017the first half of 2022, compared to 2016.an increase in borrowings of $22.5 million in the same period in the prior year.
Liquidity
We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share repurchase programs,program, environmental remediation projects, and strategic acquisitions.acquisitions for at least the next twelve months and for the foreseeable future thereafter. At September 29, 2017,July 1, 2022, cash and cash equivalents held by our foreign operations totaled $11.5$29.7 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.
A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, and debt-to-debt-plus-equity ratio, as of September 29, 2017July 1, 2022 and December 31, 20162021 is as follows:
 July 1,December 31,
(Thousands)20222021
Cash and cash equivalents$32,175 $14,462 
Total outstanding debt497,298 449,747 
Net debt$(465,123)$(435,285)
Available borrowing capacity$124,034 $176,419 



37

  September 29, December 31,
(Thousands) 2017 2016
Total outstanding debt $4,007
 $4,615
Cash 22,486
 31,464
Net debt (cash) (18,479) (26,849)
Available borrowing capacity $266,405
 $238,886
Debt-to-debt-plus-equity ratio 1% 1%

Net debt (cash) is a non-GAAP financial measure reflecting the Company's current liquiditymeasure. We are providing this information because we believe it is more indicative of our overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods. Non-GAAP financial measures, such as net debt (cash), have inherent limitations and should not be considered in isolation, or as a substitute for GAAP financial measures.
Total outstanding debt decreased $0.6 million compared to December 31, 2016.
The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation, depletion and amortization, and other adjustments. The main cause for the increase in the available borrowing capacity at September 29, 2017 as compared to December 31, 2016 was due to increased earnings before interest, income taxes, depreciation and amortization on a trailing 12-month basis.
In 2015,2021, we entered into an amendment toamended and restated the agreement governing our $375.0 million revolving credit agreementfacility (Credit Agreement). The amendment extends in connection with the HCS-Electronic Materials acquisition. A $300.0 million delayed draw term loan facility was added to the Credit Agreement and the maturity date of the Credit Agreement was extended from 20182024 to 2020 and2026. Moreover, the Credit Agreement also provides more favorable pricingfor an uncommitted incremental facility whereby, under certain circumstances. In addition,conditions, the amendmentCompany may be able to borrow additional term loans in an aggregate amount not to exceed $150.0 million. The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives. TheBorrowings under the Credit Agreement isare secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property, precious metal, copper and certain other assets.
The Credit Agreement allows usthe Company to borrow money at a premium over LIBOR or the prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available understipulated in the Credit Agreement.



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agreement. The Credit Agreement includes restrictive covenants including incurringrelating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subjectthat limit the Company to a maximum leverage ratio and a minimum fixed chargemaximum interest coverage ratio. We were in compliance with all of our debt covenants as of September 29, 2017July 1, 2022 and December 31, 2016.2021. Cash on hand does not affectup to $25.0 million can benefit the covenants orand may benefit the borrowing capacity under our debt agreements.the Credit Agreement.
In November 2021, we completed the acquisition of HCS-Electronic Materials. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300.0 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103.0 million of borrowings under its amended revolving credit facility. The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio.
Portions of our business utilize off-balance sheet consignment arrangements allowing us to financeuse bank owned metal requirements.as we manufacture product for customers. Metal is purchased from the consignee and sold to our customer at the time of product shipment. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. As a result, we have negotiated increasesThe precious metal consignment agreements, including our largest such agreement entered into in 2019 and maturing on August 27, 2022, were amended in 2021 to be more consistent with the available capacity under existing lines, added additional lines, and extended the maturity dates of existing lines in recent years.Credit Agreement. The available and unused capacity under the metal financingconsignment lines totaled approximately $149.3$200.0 million as of September 29, 2017.July 1, 2022, compared to $69.8 million as of December 31, 2021. The availability is determined by Board approved levels and actual line capacity.
In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. In the first nine months of 2017, we repurchased 32,409 shares at a cost of $1.1 million. We did not repurchase any shares under this program in the thirdsecond quarter or first six months of 2017.2022. Since the approval of the repurchase plan, we have purchased 1,082,2641,254,264 shares at a total cost of $34.3$41.7 million.
In the third quarter and first nine months of 2017, weWe paid cash dividends of $2.0$2.6 million and $5.9$5.1 million respectively, on our common stock.stock in the second quarter and first six months of 2022. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.




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OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUALCASH OBLIGATIONS
We maintain the majority of the precious metals and portions of the copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was $300.7$415.0 million and $480.2 million as of September 29, 2017, versus $194.8 million as ofJuly 1, 2022 and December 31, 2016.2021, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of September 29, 2017 and December 31, 2016.July 1, 2022. For additional information on our contractualmaterial cash obligations, refer to our 2021 Annual Report on Form 10-K for the year ended December 31, 2016.10-K.


CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. For additional information regarding critical accounting policies, please refer to our Form 10-K for the year ended December 31, 2016. There have been no material changes to our critical accounting policies subsequent to the issuance of our2021 Annual Report on Form 10-K.


Forward-looking Statements

Statements: Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking statements. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. These factors include, in addition to those mentioned elsewhere herein:

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

Our ability to effectively integrate the HTB acquisition;

The global economy;

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;




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Changes the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and liquidity, including shut downs of our facilities; our ability to achieve the strategic and other objectives related to the HCS-Electronic Materials (defined herein) acquisition, including any expected synergies; the global economy, including inflationary pressures, potential future recessionary conditions and the impact of tariffs and trade agreements; the impact of any U.S. Federal Government shutdowns or sequestrations; the condition of the markets which we serve, whether defined geographically or by segment; changes in product mix and the financial condition of customers; our success in developing and introducing new products and new product ramp-up rates; our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values; our success in identifying acquisition candidates and in acquiring and integrating such businesses, including the integration of the HCS-Electronic Materials business; 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 start-up and completion of any capital projects; other financial and economic factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal consignment fees, tax rates, exchange rates, interest rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, credit availability, and the impact of the Company’s stock price on the cost of incentive compensation plans; the uncertainties related to the impact of war, including the conflict between Russia and Ukraine, terrorist activities, and acts of God; changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations; the conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects; the disruptions in operations from, and other effects of, catastrophic and other extraordinary events including the COVID-19 pandemic; and the financial condition of customers;

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

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

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

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

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

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

Other financial factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal financing fees, tax rates, exchange rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, and the impact of the Company’s stock price on the cost of incentive compensation plans;

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

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

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

The success of the realignment of our businesses;

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

The risk factors set forth in Part 1, Item 1A of ourthe Company's 2021 Annual Report on Form 10-K for the year ended December 31, 2016.10-K.

Item 3.Quantitative and Qualitative Disclosures about Market Risk
For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2021 Annual Report on Form 10-K for the year ended December 31, 2016.10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2021 Annual Report on Form 10-K.


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Item 4.Controls and Procedures
a)Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with participation of the Company's management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of disclosure controls and procedures as of September 29, 2017July 1, 2022 pursuant to Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as



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amended (Exchange Act). Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that disclosure controls and procedures are effective as of September 29, 2017.July 1, 2022.
b)Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 29, 2017July 1, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.





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PART II OTHER INFORMATION
Item 1.Legal Proceedings

Our subsidiaries and our holding company are subject, from time to time, to a variety of civil and administrative proceedings arising out of our normal operations, including, without limitation, product liability claims, health, safety, and environmental claims, and employment-related actions. Among such proceedings are cases alleging that plaintiffs have contracted, or have been placed at risk of contracting, beryllium sensitization or chronic beryllium disease or other lung conditions as a result of exposure to beryllium (beryllium cases). The plaintiffs in beryllium cases seek recovery under negligence and various other legal theories and demand compensatory and often punitive damages, in many cases of an unspecified sum. Spouses of some plaintiffs claim loss of consortium.
The information presented
Beryllium Claims
As of July 1, 2022, our subsidiary, Materion Brush Inc., was a defendant in one beryllium case. As previously reported, a settlement agreement had been reached in one case, and the and the case was dismissed during the second quarter. In Richard Miller v. Dolphin, Inc. et al., case number CV2020-005163, filed in the Legal Proceedings sectionSuperior Court of Note N ("Contingencies")Arizona, Maricopa County, the Company is one of six named defendants and 100 Doe defendants. The plaintiff alleges that he contracted beryllium disease from exposures to beryllium-containing products supplied to his employer, Karsten Manufacturing Corporation, where he was a production worker, and asserts claims for negligence, strict liability – failure to warn, strict liability – design defect, and fraudulent concealment. The plaintiff seeks general damages, medical expenses, loss of earnings, consequential damages, and punitive damages, and his wife claims loss of consortium. A co-defendant, Dolphin, Inc., filed a cross-claim against the Company for indemnification. On August 12, 2020, the Company moved to dismiss the cross-claim for failure to state a claim upon which relief can be granted. The court denied the motion on October 23, 2020. On December 7, 2020, the Company filed a Petition for Special Action in the Court of Appeals seeking to appeal the denial of the Notesmotion to Consolidated Financial Statements (Unaudited) is incorporated hereindismiss the cross-claim. The Court of Appeals declined to accept jurisdiction on December 30, 2020. The court entered a scheduling order on September 14, 2021 that did not set a date for trial. An amended scheduling order was entered on April 8, 2022, but a date for trial was not set. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

In Ronald Dwayne Manning v. Arconic Inc. et al., case number 19CI000219, filed in the Superior Court of the State of California, Tehama County, and later removed to the United States District Court, Eastern District of California (Sacramento Division), case number 2:19-CV-02202-MCE-DMC, the Company was one of three named defendants and 120 Doe defendants. The plaintiff alleged that he contracted beryllium disease from exposures to beryllium-containing products during his employment as an auto mechanic, welder, sprinkler installer, and movie projector operator, and asserted claims for negligence, strict liability, fraudulent concealment, and breach of implied warranties. The plaintiff sought economic damages, non-economic damages, consequential damages, and punitive damages. A settlement agreement was reached in this case, and a Stipulation of Dismissal was entered by reference.the court on June 1, 2022.

No beryllium cases were filed in the second quarter of 2022.

The Company has insurance coverage, which may respond, subject to an annual deductible.

Other Claims
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. Plaintiff filed a motion for conditional certification, which the Company opposed. The motion has been fully briefed, and the parties are awaiting a decision from the court. The Company believes that it has substantive defenses and intends to vigorously defend this suit absent a negotiated resolution.




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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to repurchases of common stock made by usthe Company during the three months ended September 29, 2017July 1, 2022.
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
PeriodTotal 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)
April 2 through May 6, 2022— $— — $8,316,239 
May 7 through June 3, 20221,181 80.24 — 8,316,239 
June 4 through July 1, 2022— — — 8,316,239 
Total1,181 $80.24 — $8,316,239 
(1)Includes 895, 401, and 1,062Represents shares surrendered to the Company in July, August, and September, 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 ourits Board of Directors had authorized the repurchase of up to $50.0 million of ourits common stock. WeDuring the three months ended July 1, 2022, the Company did not repurchase any shares under this program during the third quarter of 2017.program. As of September 29, 2017, $15.7July 1, 2022, $8.3 million may still be purchased under the program.
Item 4.Mine Safety Disclosures
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this quarterly report on Form 10-Q.





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Item 6.Exhibits

31.1Item 6.Exhibits
All documents referenced below were filed pursuant to the Exchange Act by Materion Corporation, file number 001-15885, unless otherwise noted.
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)*
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95
Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended September 29, 2017*July 1, 2022*
101.INSXBRL Instance Document*Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
101.SCHInline XBRL Taxonomy Extension Schema Document*
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document*
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document*
101.LABInline XBRL Taxonomy Extension Label Linkbase Document*
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document*
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Exhibit 101 attachments)

*Submitted electronically herewith.





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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
MATERION CORPORATION
MATERION CORPORATION
Dated: August 3, 2022
Dated: October 26, 2017
/s/  Joseph P. Kelley Shelly M. Chadwick
Joseph P. KelleyShelly M. Chadwick
Vice President, Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)





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