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, 2017March 31, 2023
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.March 31, 2023: 20,608,704.






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)
 
 First Quarter Ended
(Thousands, except per share amounts)March 31, 2023April 1, 2022
Net sales$442,526 $449,045 
Cost of sales351,190 373,754 
Gross margin91,336 75,291 
Selling, general, and administrative expense40,336 41,662 
Research and development expense7,621 7,074 
Restructuring expense (income)664 1,076 
Other—net5,775 5,873 
Operating profit36,940 19,606 
Other non-operating income—net(730)(1,169)
Interest expense—net7,502 3,735 
Income before income taxes30,168 17,040 
Income tax expense4,580 3,021 
Net income$25,588 $14,019 
Basic earnings per share:
Net income per share of common stock$1.24 $0.69 
Diluted earnings per share:
Net income per share of common stock$1.23 $0.68 
Weighted-average number of shares of common stock outstanding:
Basic20,566 20,464 
Diluted20,887 20,724 
  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)
 
 First Quarter Ended
 March 31,April 1,
(Thousands)20232022
Net income$25,588 $14,019 
Other comprehensive (loss) income:
Foreign currency translation adjustment2,689 (2,047)
Derivative and hedging activity, net of tax(2,339)2,270 
Pension and post-employment benefit adjustment, net of tax(67)(240)
Other comprehensive loss283 (17)
Comprehensive income$25,871 $14,002 
  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)
March 31,Dec. 31,
(Thousands)20232022
Assets
Current assets
Cash and cash equivalents$15,243 $13,101 
Accounts receivable, net207,998 215,211 
Inventories, net434,485 423,080 
Prepaid and other current assets42,128 39,056 
Total current assets699,854 690,448 
Deferred income taxes3,335 3,265 
Property, plant, and equipment1,198,350 1,209,205 
Less allowances for depreciation, depletion, and amortization(728,788)(760,440)
Property, plant, and equipment, net469,562 448,765 
Operating lease, right-of-use assets62,352 64,249 
Intangible assets, net140,430 143,219 
Other assets22,183 22,535 
Goodwill320,268 319,498 
Total Assets$1,717,984 $1,691,979 
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt$27,727 $21,105 
Accounts payable126,866 107,899 
Salaries and wages22,077 35,543 
Other liabilities and accrued items44,186 54,993 
Income taxes4,669 3,928 
Unearned revenue20,292 15,496 
Total current liabilities245,817 238,964 
Other long-term liabilities14,255 12,181 
Operating lease liabilities57,424 59,055 
Finance lease liabilities14,068 13,876 
Retirement and post-employment benefits20,738 20,422 
Unearned income109,883 107,736 
Long-term income taxes812 665 
Deferred income taxes27,511 28,214 
Long-term debt405,482 410,876 
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 March 31 and December 31)297,802 288,100 
Retained earnings792,421 769,418 
Common stock in treasury(231,906)(220,864)
Accumulated other comprehensive loss(41,626)(41,909)
Other equity5,303 5,245 
Total shareholders' equity821,994 799,990 
Total Liabilities and Shareholders’ Equity$1,717,984 $1,691,979 

  (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
  Sept. 29, Sept. 30,
(Thousands) 2017 2016
Cash flows from operating activities:    
Net income $19,683
 $18,962
Adjustments to reconcile net income to net cash provided from (used in) operating activities:    
Depreciation, depletion, and amortization 33,444
 34,379
Amortization of deferred financing costs in interest expense 670
 417
Stock-based compensation expense (non-cash) 4,303
 2,880
(Gain) loss on sale of property, plant, and equipment 207
 (601)
Deferred income tax expense (benefit) 1,073
 (676)
Changes in assets and liabilities net of acquired assets and liabilities:   
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)
Other-net (1,324) 2,479
Net cash provided by operating activities 35,497
 27,222
Cash flows from investing activities:    
Payments for purchase of property, plant, and equipment (17,759) (20,052)
Payments for mine development (620) (8,934)
Payments for acquisition (16,504) 
Proceeds from sale of property, plant, and equipment 53
 1,366
Net cash used in investing activities (34,830) (27,620)
Cash flows from financing activities:    
Proceeds from issuance of short-term debt, net 
 3,777
Proceeds from issuance of long-term debt 55,000
 10,000
Repayment of long-term debt (55,608) (10,517)
Principal payments under capital lease obligations (644) (549)
Cash dividends paid (5,903) (5,601)
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)
Effects of exchange rate changes 1,293
 524
Net change in cash and cash equivalents (8,978) (8,430)
Cash and cash equivalents at beginning of period 31,464
 24,236
Cash and cash equivalents at end of period $22,486
 $15,806
 Three Months Ended
 March 31,April 1,
(Thousands)20232022
Cash flows from operating activities:
Net income$25,588 $14,019 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization15,092 13,179 
Amortization of deferred financing costs in interest expense424 511 
Stock-based compensation expense (non-cash)2,250 1,699 
Deferred income tax (benefit) expense(52)401 
Changes in assets and liabilities:
Accounts receivable
7,538 (15,045)
Inventory(12,081)(28,129)
Prepaid and other current assets(2,865)(5)
Accounts payable and accrued expenses(1,904)(4,177)
Unearned revenue254 (343)
Interest and taxes payable
657 1,874 
Unearned income due to customer prepayments7,724 — 
Other-net(4,520)1,712 
Net cash (used in) provided by operating activities38,105 (14,304)
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment(30,014)(18,977)
Proceeds from sale of property, plant, and equipment212 11 
Net cash used in investing activities(29,802)(18,966)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit agreement, net4,600 49,067 
Repayment of debt(3,907)(3,839)
Principal payments under finance lease obligations(799)(686)
Cash dividends paid(2,571)(2,520)
Payments of withholding taxes for stock-based compensation awards(3,614)(2,717)
Net cash provided by financing activities(6,291)39,305 
Effects of exchange rate changes130 (260)
Net change in cash and cash equivalents2,142 5,775 
Cash and cash equivalents at beginning of period13,101 14,462 
Cash and cash equivalents at end of period$15,243 $20,237 


The accompanying
See 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 December 31, 202220,543 (6,605)$288,100 $769,418 $(220,864)$(41,909)$5,245 $799,990 
Net income— — — 25,588 — — — 25,588 
Other comprehensive loss— — — — — 283 — 283 
Cash dividends declared ($0.125 per share)— — — (2,571)— — — (2,571)
Stock-based compensation activity98 98 9,675 (14)(7,411)— — 2,250 
Payments of withholding taxes for stock-based compensation awards(33)(33)— — (3,614)— — (3,614)
Directors’ deferred compensation27 — (17)— 58 68 
Balance at March 31, 202320,609 (6,539)$297,802 $792,421 $(231,906)$(41,626)$5,303 $821,994 
Balance at December 31, 202120,448 (6,700)$271,978 $693,756 $(209,920)$(40,169)$4,795 $720,440 
Net income— — — 14,019 — — — 14,019 
Other comprehensive loss— — — — — (17)— (17)
Cash dividends declared ($0.12 per share)— — — (2,520)— — — (2,520)
Stock-based compensation activity95 95 6,572 — (4,873)— — 1,699 
Payments of withholding taxes for stock-based compensation awards(33)(33)— — (2,717)— — (2,717)
Directors’ deferred compensation39 — (39)— 60 60 
Balance at April 1, 202220,511 (6,637)$278,589 $705,255 $(217,549)$(40,186)$4,855 $730,964 

















See notes to these consolidated financial statements.



6


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 20162022 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.
Business Combinations: The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
The amounts reflected in Note B to the Consolidated Financial Statements are the results of the preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.
New Pronouncements Adopted:
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacts several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement, and the tax effects 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, as an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted the new guidance during the first quarter of 2017. An impact of adoption was the recognition of excess tax benefits in Income tax expense rather than Shareholders' equity in 2017. As a result, the Company recognized discrete tax benefits of $129 and $503 in Income tax expense during the third quarter and first nine months of 2017, respectively. The cash flow classification requirements of ASU 2016-09 were applied retrospectively. As a result, for the nine 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 2017,2020, the FASB issued ASU 2017-12, Derivatives2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance is intended to provide temporary optional expedients and Hedging (Topic 815): Targeted Improvementsexceptions to Accounting for Hedging Activities, which amendsthe U.S. GAAP guidance on contract modifications and simplifies existing guidancehedge accounting to allow companies to more accurately present the economic effects of risk management activities inease the financial statements.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 ASUguidance is effective for fiscal years beginning afteravailable immediately and may be implemented in any period prior to the guidance expiration on December 15, 2018, including interim periods within those periods, with early adoption permitted.31, 2024. The Company is currently evaluating the impact of adoptinghas applied 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 retrospectivelyaccounting 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 benefitsinterest rate swaps discussed 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,Note M. Any additional reference rate reform impacts will be effectiveaccounted 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 issuedin accordance with 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 judgment2020-04 and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount, and timing of revenue and cash flows arising from contracts. This ASU is effective beginning in fiscal year 2018 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. To evaluate the impact of adopting this new guidance on the consolidated financial statements, the Company established a cross-functional implementation team to assess its revenue streams against the requirements of this ASU. In addition, the Company is in the process of identifying and implementing changes to its processes and controls to meet the standard's updated reporting and disclosure requirements. The Company plans to adopt the standard as of the first quarter of 2018 using the modified retrospective approach and will record a cumulative-effect adjustment to equity for open contracts as of January 1, 2018. The Company continues to update its assessment of the impact of the standard and related updates to its consolidated financial statements, and will disclose material impacts, if any.2022-06.
No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

Note B — Acquisitions

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



7


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


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

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

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

Note C — Segment Reporting

The Company has the following operatingreportable segments: Performance Alloys and Composites, AdvancedMaterials, 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.



8



The Other reportable segment includes unallocated corporate costs and assets.


The primary measurement used by management to measure the financial performance of each segment is earnings before interest, taxes, depreciation and amortization ("EBITDA"). 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 first quarter of 2023 and 2022:


7


(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
(Thousands)Three months ended March 31, 2023Three months ended April 1, 2022
Net sales:
Performance Materials (1)
187,014 149,630 
Electronic Materials(1)
228,820 270,836 
Precision Optics26,692 28,579 
Other — 
Net sales$442,526 $449,045 
Segment EBITDA:
Performance Materials42,770 24,792 
Electronic Materials13,955 12,148 
Precision Optics2,692 2,191 
Other(6,655)(5,177)
Total Segment EBITDA$52,762 $33,954 
Income tax expense4,580 3,021 
Interest expense - net7,502 3,735 
Depreciation, depletion and amortization15,092 13,179 
Net income$25,588 $14,019 

Intersegment(1) Excludes inter-segment sales of $3.1 million for the first quarter of 2023 and $5.5 million for the first quarter of 2022 for Electronic Materials and $0.3 million for the first quarter of 2022 for Performance Materials. Inter-segment sales are eliminated in consolidation.



The following table disaggregates revenue for each segment by end market for the first quarter of 2023 and 2022:


8


 (Thousands)Performance MaterialsElectronic MaterialsPrecision OpticsOtherTotal
First Quarter 2023
End Market
Semiconductor$2,590 $180,616 $911 $ $184,117 
Industrial38,674 12,969 8,733  60,376 
Aerospace and defense30,358 2,077 4,648  37,083 
Consumer electronics9,356 187 3,255  12,798 
Automotive25,493 1,501 2,608  29,602 
Energy13,468 24,951   38,419 
Telecom and data center16,126 13   16,139 
Other50,949 6,506 6,537  63,992 
Total$187,014 $228,820 $26,692 $ $442,526 
First Quarter 2022
End Market
Semiconductor$1,800 $214,922 $1,327 $— $218,049 
Industrial40,069 15,866 8,434 — 64,369 
Aerospace and defense23,684 2,614 5,145 — 31,443 
Consumer electronics13,002 325 5,312 — 18,639 
Automotive22,235 1,657 2,464 — 26,356 
Energy10,849 29,119 — — 39,968 
Telecom and data center16,081 45 — — 16,126 
Other21,910 6,288 5,897 — 34,095 
Total$149,630 $270,836 $28,579 $— $449,045 


Note DCOther-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 March 31, 2023. 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 March 31, 2023, the aggregate amount of 2017 and 2016 is summarized as follows:the transaction price allocated to remaining performance obligations was approximately $70.1 million.


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




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)March 31, 2023December 31, 2022$ change% change
Accounts receivable, trade$208,633 $215,726 $(7,093)(3)%
Unbilled receivables13,919 10,765 3,154 29 %
Unearned revenue20,292 15,496 4,796 31 %
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 first three months of 2023.

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 $7.5 million of the December 31, 2022 unearned amounts as revenue during the first three months of 2023.

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

Note D — Other-net

Other-net for the first quarter of 2023 and 2022 is summarized as follows: 
 First Quarter Ended
 March 31,April 1,
(Thousands)20232022
Amortization of intangible assets$3,121 $3,131 
Metal consignment fees2,929 3,011 
Foreign currency (gain) loss(208)(333)
Net (gain) loss on disposal of fixed assets5 (11)
Other items(72)75 
Total$5,775 $5,873 
Note E — Restructuring
In 2017, the Company completed cost reduction actions in order to align costs with commensurate business levels. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. Costs associated with these actions within the Other and Precision Coatings segments included severance associated with approximately twenty-three employees and other related costs.
In 2016, the Company initiated a plan to close the Fukuya, Japan service center, which is a part of the Performance Alloys and Composites segment. Costs associated with the plan included severance associated with approximately twelve employees and related facility exit costs.
These costs are presented in the Consolidated Statements of Income as follows:
  Third Quarter Ended Nine Months Ended
(Thousands) Sept. 29, 2017 Sept. 30, 2016 Sept. 29, 2017 Sept. 30, 2016
Cost of sales $346
 $
 $463
 $
Selling, general, and administrative (SG&A) expense 127
 
 1,259
 
Other-net 189
 
 189
 
Total $662
 $
 $1,911
 $
Remaining severance payments related to these initiatives of $0.3 million are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company does not expect to incur additional costs related to these initiatives.

Note F — Income Taxes

The Company recorded income tax expense of $1.7 million in the third quarter of 2017, anCompany's effective tax rate of 15.5% against income before income taxes, and income tax expense of $1.6 million infor the thirdfirst quarter of 2016, an2023 and 2022 was 15.2% and 17.7%, respectively. The effective tax rate of 16.7% against income before income taxes.
Infor the first nine months of 2017, the Company recorded income tax expense of $3.3 million, an effective tax rate of 14.4%, and income tax expense of $3.1 million in the first nine months of 2016, an effective tax rate of 14.0%.
The Company recorded discrete benefits of $0.5 million and $1.3 million, respectively, in the third quarter and first nine months of 2017. Of these amounts, $0.4 million related to the reversal of uncertain tax positions due to a lapse in the statute of limitations in the third quarter of 2017. Also, $0.1 million in the third quarter and $0.5 million in the first nine months of 2017 related to the adoption of ASU 2016-09, Improvements to Employee Share-based Payment Accounting.
The Company recorded discrete items in the first nine months of 2016, resulting in a net tax benefit of $1.0 million, primarily due to international tax planning initiatives.
Income tax expense in the third quarter and first nine months of both 2017 and 20162023 was lower than the U.S Federal statutory income tax rate of 35% primarily due to the impact of percentage depletion, the foreign rate differential,derived intangible income deduction, and research and development credit,credits. The effective tax rate for the first quarter of 2023 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits and other items.from stock-based compensation awards. The effective tax rate for the first quarter of 2022 included a net discrete income tax benefit of $0.1 million, primarily related to excess tax benefits from stock-based compensation awards.


Government Tax Credits





10



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


On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law. The IRA, among other provisions, includes a new corporate alternative minimum tax on certain large corporations and new or enhanced federal energy and manufacturing tax credits effective for tax years beginning in 2023. The Company is not subject to the minimum tax as our average annual book profits over the prior three-year period were less than $1 billion. The IRA introduced a new advanced manufacturing production credit (“production credit”), which provides an annual cash benefit for a portion of production costs for the sale of certain minerals produced in the U.S. and sold by a taxpayer during the year.

The IRA affords the Company eligibility to a production credit beginning in 2023, for which the Company expects to recognize cash savings of approximately $8 million for the year ending December 31, 2023. The issuance of guidance and interpretation as to the eligibility for, calculation of, and methods for claiming the production credit remain pending. We will continue to monitor developments related to the production credit from the IRS and US Treasury Department and evaluate the potential impact to the Company’s production credit. The Company will finalize the expected annual production credit impact as further guidance is issued.

The production credit is recorded as a reduction in cost of goods sold as the applicable items are produced and sold. U.S. GAAP does not address the accounting for government grants received by a business entity that are outside the scope of ASC 740. Our accounting policy is to analogize to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, under IFRS Accounting Standards, under which we recognize the benefit of tax credits accounted for by applying IAS 20 in pretax income on a systematic basis in line with its recognition of the expenses that the grant is intended to compensate.

Note GF — Earnings Per Share (EPS)

The following table sets forth the computation of basic and diluted EPS:
First Quarter Ended
March 31,April 1,
(Thousands, except per share amounts)20232022
Numerator for basic and diluted EPS:
Net income (loss)$25,588 $14,019 
Denominator:
Denominator for basic EPS:
Weighted-average shares outstanding20,566 20,464 
Effect of dilutive securities:
Stock appreciation rights103 97 
Restricted stock units105 106 
Performance-based restricted stock units113 57 
Diluted potential common shares321 260 
Denominator for diluted EPS:
Adjusted weighted-average shares outstanding20,887 20,724 
Basic EPS$1.24 $0.69 
Diluted EPS$1.23 $0.68 
  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 219,29217,902 and 982,588117,390 for the quarters ended September 29, 2017March 31, 2023 and September 30, 2016, respectively,April 1, 2022, respectively. These securities are primarily related to restricted stock units (RSUs) and 370,917stock appreciation rights (SARs) with fair market values and 993,418 forexercise prices greater than the nine months ended September 29, 2017average market price of the Company's common shares and September 30, 2016, respectively, were excluded from the dilution calculation as theirthe effect would have been anti-dilutive.





11


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note HG — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:
March 31,December 31,
(Thousands)20232022
Raw materials and supplies$116,404 $113,694 
Work in process250,920 249,105 
Finished goods67,161 60,281 
Inventories, net$434,485 $423,080 
  Sept. 29, Dec. 31,
(Thousands) 2017 2016
Raw materials and supplies $44,924
 $36,233
Work in process 181,553
 169,327
Finished goods 37,671
 38,147
Subtotal $264,148
 $243,707
Less: LIFO reserve balance 43,925
 42,842
Inventories $220,223
 $200,865

The 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 price movements and to reduce its working capital investment. The notional value of sales inoff-balance sheet precious metals and copper was $367.5 million and $373.1 million as of March 31, 2023 and December 31, 2022, respectively.

Note H — Customer Prepayments

In 2020, the thirdCompany 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 2017 or 2016. In2022, 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 March 31, 2023, the Company has received approximately $29.7 million in prepayments under the terms of this amended agreement, of which $7.7 million was received during the first nine monthsquarter of 2017, cost2023.

As of sales were increased by $0.2 million. InMarch 31, 2023 and December 31, 2022, $89.0 million and $85.9 million, respectively, of prepayments are classified as Unearned income on the first nine monthsConsolidated Balance Sheets. The prepayments will remain in Unearned income until commercial purchase orders are received for product serviced out of 2016, costthe equipment, at which time a portion of sales were reduced by $3.2 million.the purchase order value related to prepayments will be reclassified to Unearned revenue. As of March 31, 2023 $5.1 million of the prepayments are classified as Unearned revenue.



12


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note I — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the thirdfirst quarter of 2023 and first nine months of 2017 and 20162022 for the domestic pension plans (which include theas shown below. The Pension Benefits columns aggregate defined benefit pension planplans in the U.S., Germany, Liechtenstein, England, and the U.S. supplemental retirement plans) andplans. The Other Benefits columns include the domestic retiree medical and life insurance plan.

 Pension BenefitsOther Benefits
 First Quarter EndedFirst Quarter Ended
March 31,April 1,March 31,April 1,
(Thousands)2023202220232022
Components of net periodic benefit (income) cost
Service cost$222 $318 $13 $22 
Interest cost1,973 1,223 68 39 
Expected return on plan assets(2,439)(2,400) — 
Amortization of prior service cost (benefit)(23)(20)(139)(374)
Amortization of net loss (gain)(81)430 (95)(68)
Total net benefit (income) cost$(348)$(449)$(153)$(381)
The Company did not make any contributions to its defined benefit plan in the first quarter of 2023 or 2022.
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in Other non-operating (income) expense.




1113


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


 
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 made contributions to the domestic defined benefit pension plan of $8.0 million and $12.0 million in the first nine months of 2017 and 2016, respectively.
Beginning in 2017, the Company has elected to use a spot-rate approach to estimate the service and interest 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 approach to determine the service and interest cost components. The change is being accounted for as a change in estimate and, accordingly, is being applied prospectively. The reduction in service and interest costs for 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.


Note J — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the thirdfirst quarter of 2023 and first nine months of 2017 and 20162022 are as follows:
Gains and Losses on Cash Flow Hedges
(Thousands)Foreign CurrencyInterest RatePrecious MetalsTotalPension and Post-Employment BenefitsForeign Currency TranslationTotal
Balance at December 31, 2022$1,243 $6,055 $(223)$7,075 $(40,228)$(8,756)$(41,909)
Other comprehensive income (loss) before reclassifications(67)(1,703)(475)(2,245)— 2,689 444 
Amounts reclassified from accumulated other comprehensive income (loss)(35)(782)25 (792)(338)— (1,130)
Net current period other comprehensive (loss) income before tax(102)(2,485)(450)(3,037)(338)2,689 (686)
Deferred taxes(24)(571)(103)(698)(271)— (969)
Net current period other comprehensive (loss) income after tax(78)(1,914)(347)(2,339)(67)2,689 283 
Balance at March 31, 2023$1,165 $4,141 $(570)$4,736 $(40,295)$(6,067)$(41,626)
Balance at December 31, 2021$2,348 $— $72 $2,420 $(39,702)$(2,887)$(40,169)
Other comprehensive (loss) income before reclassifications153 3,112 (520)2,745 — (2,047)698 
Amounts reclassified from accumulated other comprehensive income (loss)(19)115 107 203 (1,000)— (797)
Net current period other comprehensive (loss) income before tax134 3,227 (413)2,948 (1,000)(2,047)(99)
Deferred taxes31 742 (95)678 (760)— (82)
Net current period other comprehensive (loss) income after tax103 2,485 (318)2,270 (240)(2,047)(17)
Balance at April 1, 2022$2,451 $2,485 $(246)$4,690 $(39,942)$(4,934)$(40,186)
  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



12


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)



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 (Loss). Reclassifications from accumulated other comprehensive income (loss) of gains and losses on precious metal and copper cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Reclassifications from accumulated other comprehensive income (loss) of gains and losses on precious metalthe interest rate cash flow hedges arehedge is recorded in Cost of salesInterest expense in the Consolidated Statements of Income. Refer to Note M for additional details on cash flow hedges.
Reclassifications from accumulated other comprehensive income (loss) for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note I for additional details on pension and post-employment expenses.






14



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


Note K — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $1.5$2.4 million and $6.2$1.8 million in the thirdfirst quarter of 2023 and first nine months of 2017, respectively, compared to $2.1 million and $4.4 million in the same periods of 2016.2022, respectively.
The Company granted 97,01547,084 SARs to certain employees during the first nine monthsquarter of 2017.2023. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ninethree months ended September 29, 2017March 31, 2023 were $35.26$113.28 and $10.89,$42.27, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:
Risk-free interest rate1.924.27 %
Dividend yield1.10.44 %
Volatility34.039.0 %
Expected term (in years)5.6
4.5
The Company granted 62,18547,759 stock-settled restricted stock units (RSUs) and 32,466 cash-settled RSUs to certain employees and non-employee directors during the first nine monthsquarter of 2017.2023. 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$113.05 for stock-settled RSUs granted to employees during the ninethree months ended September 29, 2017. Cash-settledMarch 31, 2023. 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 nine monthsquarter of 2017.2023. The weighted-average fair value of the stock-settled PRSUs was $30.28$154.97 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, unearnedMarch 31, 2023, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $5.3$22.2 million, and is expected to be recognized over the remaining vesting period of the respective grants.


Note L — Fair Value of Financial Instruments

The Company measures and records financial instruments at fair value. A fair value hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 — Quoted market prices in active markets for identical assets and liabilities;
Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect
those that a market participant would use.





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, 2017March 31, 2023 and December 31, 2016:2022:
          
(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 201620232022202320222023202220232022
Financial Assets                Financial Assets
Deferred compensation investments $2,149
 $1,734
 $2,149
 $1,734
 $
 $
 $
 $
Deferred compensation investments$3,860 $3,001 $3,860 $3,001 $ $— $ $— 
Foreign currency forward contracts 149
 691
 
 
 149
 691
 
 
Foreign currency forward contracts385 1,291  — 385 1,291  — 
Interest rate swapInterest rate swap7,175 7,863  — 7,175 7,863  — 
Precious metal swaps 45
 
 
 
 45
 
 
 
Precious metal swaps131 118  — 131 118  — 
Total $2,343
 $2,425
 $2,149
 $1,734
 $194
 $691

$

$
Total$11,551 $12,273 $3,860 $3,001 $7,691 $9,272 $ $— 
Financial Liabilities                Financial Liabilities
Deferred compensation liability $2,149
 $1,734
 $2,149
 $1,734
 $
 $
 $
 $
Deferred compensation liability$3,860 $3,001 $3,860 $3,001 $ $— $ $— 
Foreign currency forward contracts 669
 1
 
 
 669
 1
 
 
Foreign currency forward contracts741 1,757  — 741 1,757  — 
Interest rate swapInterest rate swap1,797 —  — 1,797 — — 
Precious metal swaps 197
 
 
 
 197
 
 
 
Precious metal swaps874 411  — 874 411  — 
Total $3,015
 $1,735
 $2,149
 $1,734
 $866
 $1
 $
 $
Total$7,272 $5,169 $3,860 $3,001 $3,412 $2,168 $ $— 
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, 2017March 31, 2023 and December 31, 2016.2022. 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 M — 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 O. The swap hedges the change in 1-month Secured Overnight Financial Rate (SOFR) from March 4, 2022 to November 2, 2026. On March 21, 2023, the Company entered into two $50.0 million interest rate swaps to hedge the interest rate risk on the Credit Agreement described in Note O. The swaps hedge the change in 1-month USD-SOFR. The purpose of these hedges 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


16


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar.
The use of forward contracts locks in a firm rate and eliminates any downside risk from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but 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 that changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutionsprecious metal consignors that charge the Company a financing feeconsignment fees based upon the current value of the metal as it fluctuates while on hand.consignment. Each precious metal consignor 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 creditconsignment 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


17


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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.
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, 2017March 31, 2023 and December 31, 2016:2022:
 September 29, 2017 December 31, 2016 March 31, 2023December 31, 2022
(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$13,277 $156 $12,242 $791 
Other liabilities and accrued items        Other liabilities and accrued items18,054 201 17,061 1,048 
Foreign currency forward contracts - euro $14,402
 $(11) $
 $
Total $14,402
 $(11) $
 $
These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included $0.2 million and $0.7 million of foreign currency losses relatingand gains related to these derivatives in the first quarter of $0.5 million2023 and $1.1 million during the third quarter2022, respectively.


18


Materion Corporation and first nine months of 2017, respectively.Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and the balance sheet classification as of September 29, 2017March 31, 2023 and December 31, 2016:2022:
March 31, 2023
 September 29, 2017 December 31, 2016Fair Value
(Thousands) 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
(Thousands)Notional
Amount
Prepaid and other current assetsOther assetsOther liabilities and accrued itemsOther long-term liabilities
Prepaid expenses        
Foreign currency forward contracts - yen $2,000
 $59
 $2,418
 $239
Foreign currency forward contracts - yen$2,063 $98 $ $49 $ 
Foreign currency forward contracts - euro 6,829
 90
 6,493
 452
Foreign currency forward contracts - euro17,129 131  491  
Precious metal swaps 2,148
 13
 
 
Precious metal swaps8,486 131  874  
Interest rate swapInterest rate swap200,000 3,725 3,450  1,797 
Total 10,977
 162
 8,911
 691
Total$227,678 $4,085 $3,450 $1,414 $1,797 
        
Other assets        
Precious metal swaps 1,932
 32
 
 
Total 1,932
 32
 
 
        December 31, 2022
Other liabilities and accrued items        
Fair Value
Notional
Amount
Prepaid and other current assetsOther assetsOther liabilities and accrued itemsOther long-term liabilities
Foreign currency forward contracts - yenForeign currency forward contracts - yen$2,985 $145 $— $74 $26 
Foreign currency forward contracts - euro 12,689
 (658) 537
 (1)Foreign currency forward contracts - euro25,712 355 — 472 137 
Precious metal swaps 7,845
 (170) 
 
Precious metal swaps8,758 118 — 411 — 
Interest rate swapInterest rate swap100,000 3,114 4,749 — — 
Total 20,534
 (828) 537
 (1)Total$137,455 $3,732 $4,749 $957 $163 
        
Other long-term liabilities        
Precious metal swaps 1,999
 (27) 
 
Total $35,442
 $(661) $9,448
 $690
All of thesethe contracts summarized above were designated and effective as cash flow hedges. No ineffectiveness expense was recordedWe expect to reclassify $2.7 million of gains into earnings in the third quarter or first ninenext 12 months contemporaneously with the earnings effects of 2017 or 2016.
Changes in the fair valuerelated forecasted transactions. At March 31, 2023, the maximum term of outstanding cash flow hedges recorded in OCI for the first nine months of 2017 and 2016 totaled decreases of $1.2 million and $1.6 million, respectively. The Company expects to relieve substantially the entire balance in OCI as of September 29, 2017 to the Consolidated Statements of Income within the next 18-month period.derivative instruments that hedge forecasted transactions was approximately four years. Refer to Note J for additional OCI details.
The following table summarizes the amounts reclassified from accumulated other comprehensive income related to the Company’s outstanding derivatives designated as cash flow hedges and associated income statement classification as of the first quarter of 2023 and 2022: 
 First Quarter Ended
(Thousands)March 31, 2023April 1, 2022
Hedging relationshipLine item
Foreign currency forward contractsNet sales$(35)$(19)
Precious metal swapsCost of sales25 107 
Interest rate swapInterest expense - net(782)115 
Total$(792)$203 

Note N — Contingencies

Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note Q ("ContingenciesS "Contingencies and Commitments") in the Company's 20162022 Annual Report on Form 10-K.
One beryllium case was outstanding as of March 31, 2023. The Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.
Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be





1819



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


loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. Plaintiff filed a motion for conditional certification, which the Company opposed. On August 2, 2022, the Court conditionally certified a class of employees at the Company’s Elmore facility only and rejected certification of a class across the Company’s other facilities.
In November 2022, the parties reached a settlement for an immaterial amount. The Court preliminarily approved the settlement on March 30, 2023 and set a final approval hearing for July 2023.
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$4.4 million and $4.5 millionat September 29, 2017March 31, 2023 and $6.0 million at December 31, 2016.2022, 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 O — Debt
(Thousands)March 31, 2023December 31, 2022
Borrowings under Credit Agreement$145,155 $143,250 
Borrowings under the Term Loan Facility281,250 285,000 
Foreign debt10,366 7,541 
Total debt outstanding436,771 435,791 
Current portion of long-term debt(27,727)(21,105)
Gross long-term debt409,044 414,686 
Unamortized deferred financing fees(3,562)(3,810)
Long-term debt$405,482 $410,876 

As of March 31, 2023 and December 31, 2022, the Company had $145.2 million outstanding at an average interest rate of 6.42% and $143.3 million outstanding at an average interest rate of 6.08%, respectively, under its revolving credit facility. The available borrowing capacity under the revolving credit facility as of March 31, 2023 was $186.8 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 March 31, 2023.

The balance outstanding on the term loan facility as of March 31, 2023 and December 31, 2022 was $281.3 million and $285.0 million, respectively.

At both March 31, 2023 and December 31, 2022, there was $46.5 million outstanding against the letters of credit sub-facility.


20


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


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





21


RESULTS OF OPERATIONS
Third
First Quarter
 First Quarter Ended
March 31,April 1,$%
(Thousands, except per share data)20232022ChangeChange
Net sales$442,526 $449,045 $(6,519)(1)%
Value-added sales298,558 259,124 39,434 15 %
Gross margin91,336 75,291 16,045 21 %
Gross margin as a % of value-added sales31 %29 %
Selling, general, and administrative (SG&A) expense40,336 41,662 (1,326)(3)%
SG&A expense as a % of value-added sales14 %16 %
Research and development (R&D) expense7,621 7,074 547 %
R&D expense as a % of value-added sales3 %%
Restructuring (income) expense664 1,076 (412)NM
Other—net5,775 5,873 (98)(2)%
Operating profit36,940 19,606 17,334 88 %
Other non-operating (income)—net(730)(1,169)439 (38)%
Interest expense—net7,502 3,735 3,767 101 %
Income before income taxes30,168 17,040 13,128 77 %
Income tax expense (benefit)4,580 3,021 1,559 52 %
Net income$25,588 $14,019 $11,569 83 %
Diluted earnings per share$1.23 $0.68 $0.55 81 %
  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/ANM = Not ApplicableMeaningful





19



Net sales of $294.3$442.5 million in the thirdfirst quarter of 2017 were $44.72023 decreased $6.5 million higher than the $249.6from $449.0 million recorded in the thirdfirst quarter of 2016. Net2022. Increased net sales in the Performance Materials was partially offset by a decrease in net sales in the Electronic Materials and Precision Optics segments. Volume and price increases in the aerospace and defense end market (15%) and incremental sales from the clad strip project of $38.6$36.2 million duringwere offset by decreased sales in the thirdsemiconductor (16%), industrial (5%) and consumer electronics (31%) end markets when compared to the same period last year. Additionally, there was a $8.9 million year over year decrease in the volume of raw material beryllium hydroxide sales compared to the first quarter of 2017 were attributable to2022. See Note B - Segment Reporting for additional details on the high performance target materials business of the Heraeus Group (HTB). Changesyear over year changes in our net sales by segment and market.

The change in precious metal and copper prices negativelyunfavorably impacted net sales induring the thirdfirst quarter of 20172023 by approximately $2.4 million when compared to the third quarter of 2016.$4.8 million.


Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices.prices and changes in mix due to customer-supplied material. Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein. Value-added sales of $171.4$298.6 million in the thirdfirst quarter of 20172023 increased $14.4$39.4 million, or 9%15%, compared to the thirdfirst quarter of 2016. Value-added2022. The increase was driven by increased value-added sales into the aerospace and defense (21%) and automotive (23%) end markets as well as $36.2 million of incremental sales from the HTB acquisition totaled $11.4 millionclad strip project, slightly offset by a year over year decrease in the thirdvolume of raw material beryllium hydroxide sales of $8.9 million compared to the first quarter of 2017. Value-added sales2022.

Gross margin in the first quarter of 2023 was $91.3 million, which was up 21% compared to the consumer electronics end market, which accounted for 31% of our total value-added sales during the thirdfirst 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 2016.2022. Gross margin expressed as a percentage of value-added sales was 32%increased to 31% in the thirdfirst quarter of both 2017 and 2016.2023 from 29% in the first quarter of 2022. Gross margin increased from the prior year primarily due to $7.5 million of inventory step up amortization from the HCS-Electronic Material acquisition that was recorded during the first quarter of 2022, that did not recur in 2023. In addition, the production tax credit recorded in the first quarter of 2023 favorably impacted gross margin. See Note E to the Consolidated Financial Statements for further discussion.


SG&A expense was $36.4$40.3 million in the thirdfirst quarter of 2017, or $2.22023, compared to $41.7 million higher than the $34.2 million recorded in the thirdfirst quarter of 2016.2022. The increase is attributable todecrease in SG&A expense from the prior year period was primarily driven by $2.1 million of HTB expenses.merger and acquisition costs



22


related to the acquisition of HCS-Electronic Materials incurred in the first quarter of 2022, that did not recur in 2023. Expressed as a percentage of value-added sales, SG&A expense was 14% and 16% in the first quarter of 2023 and 2022, respectively.

R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D expensespend was flat as a percentage3% of value-added sales at approximately 2%in both the first quarter of 2023 and 2022.

Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first quarter of 2023, we recorded a combined total of $0.7 million of restructuring charges in our Precision Optics and Electronic Materials segments, compared to $1.1 million of restructuring charges in the thirdfirst quarter of both 20172022 recorded in our Precision Optics, Electronic Materials and 2016.Other segments.


Other-net was $3.8$5.8 million of expense in the thirdfirst quarter of 2017,2023, or a $0.6$0.1 million increasedecrease from the thirdfirst quarter of 2016. Other-net2022, primarily driven by a $0.1 million decrease in the third quarter of 2017 included higher metal consignment fees of $0.8 million, as compared to the third quarter of 2016.fees. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.


InterestOther non-operating (income) expense-net was $0.5 million in the third quarterincludes components of both 2017pension and 2016.

Income taxpost-retirement expensefor the third quarter of 2017 was $1.7 million, compared to $1.6 million in the third quarter of 2016. The effective tax rate for the third quarter of 2017 was 15.5% compared to 16.7% 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 third quarter of 2017 and 2016.than service costs. Refer to Note F to the Consolidated Financial Statements for further details on income taxes.




20



Nine Months
  Nine Months Ended
  Sept. 29, Sept. 30, $ %
(Thousands, except per share data) 2017 2016 Change Change
Net sales $830,779
 $734,906
 $95,873
 13%
Value-added sales 496,462
 454,793
 41,669
 9%
Gross margin 152,756
 139,418
 13,338
 10%
Gross margin as a % of value-added sales 31% 31% N/A
 N/A
SG&A expense
 108,118
 97,101
 11,017
 11%
SG&A expense as a % of value-added sales 22% 21% N/A
 N/A
R&D expense 10,103
 9,860
 243
 2%
R&D expense as a % of value-added sales 2% 2% N/A
 N/A
Other—net 9,823
 8,997
 826
 9%
Operating profit 24,712
 23,460
 1,252
 5%
Interest expense—net 1,721
 1,417
 304
 21%
Income before income taxes 22,991
 22,043
 948
 4%
Income tax expense 3,308
 3,081
 227
 7%
Net income $19,683
 $18,962
 $721
 4%
         
Diluted earnings per share $0.97
 $0.94
 $0.03
 3%
N/A = Not Applicable

Net sales of $830.8 million in the first nine months of 2017 were $95.9 million higher than the $734.9 million recorded in the first nine months of 2016. Changes in precious metal and copper prices favorably impacted net sales in the first nine months of 2017 by approximately $6.0 million when compared to the first nine months of 2016. Net sales in the Performance Alloys and Composites segment increased $18.5 million due to higher sales volume, including shipments of raw material beryllium hydroxide. Net sales of $77.9 million during the first nine months of 2017 were attributable to the HTB acquisition. Excluding the HTB acquisition, net sales in the Advanced Materials segment increased $22.7 million due to higher sales volume in the consumer electronics and industrial components end markets. These favorable impacts were offset by lower sales volume in the medical end market in the Precision Coatings segment.

Value-added sales of $496.5 million in the first nine months of 2017 increased $41.7 million, or 9% compared to the first nine months of 2016. Value-added sales from the HTB acquisition totaled approximately $24.9 million in the first nine months of 2017. Value-added sales to the consumer electronics end market, which accounted for 30% of our total value-added sales during the first nine months of 2017, increased $9.7 million from the prior-year period. Also, value-added sales in the industrial components end market increased $10.4 million from the prior-year period.

Gross margin in the first nine months of 2017 was $152.8 million, or $13.4 million higher than the $139.4 million gross margin recorded during the first nine months of 2016. Gross margin was 31% of value-added sales in the first nine months of both 2017 and 2016.

SG&A expense was $108.1 million in the first nine months of 2017, or $11.0 million higher than the $97.1 million recorded in the first nine months of 2016. The increase related to higher incentive compensation and stock-based compensation expense of $8.1 million, which included $1.4 million due to accelerated stock compensation expense associated with the transition of the Company's CEO. Additionally, the increase is attributable to HTB expenses of $4.2 million.

R&D expense was flat as a percentage of value-added sales at approximately 2% in the first nine months of both 2017 and 2016.

Other-net was $9.8 million and $9.0 million of expense in the first nine months of 2017 and 2016, respectively. Other-net in the first nine months of 2017 included higher metal consignment fees of $1.3 million, as compared to the first nine months of 2016. Refer to Note DI to the Consolidated Financial Statements for details of the major components within Other-net.components.


Interest expense-net was $1.7$7.5 million and $3.7 million in the first nine monthsquarter of 2017, or a $0.32023 and 2022, respectively. The increase in interest expense is primarily due to an increase in interest rates compared to the prior year.

Income tax expensefor the first quarter of 2023 was expense of $4.6 million, increase from $1.4compared to $3.0 million in the first nine monthsquarter of 2016 due to higher average debt outstanding.




21



Income tax expensefor the first nine months of 2017 was $3.3 million, compared to $3.1 million in the first nine months of 2016.2022. The effective tax rate for the first nine monthsquarter of 20172023 and 2022 was 14.4% compared to an15.2% and 17.7%, respectively. The effective tax rate for the first quarter of 14.0% in2023 was lower than the prior-year period. The effectsstatutory tax rate primarily due to the impact of percentage depletion, the foreign rate differential, thederived intangible income deduction, and 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 nine months of 2017 and 2016. Refer tocredits. See Note FE to the Consolidated Financial Statements for further details on income taxes.additional discussion.




22




Value-Added Sales - Reconciliation of Non-GAAP Financial Measure


23


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 first nine monthsquarter of 20172023 and 20162022 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.
 First Quarter Ended
March 31,April 1,
(Thousands)20232022
Net sales
Performance Materials$187,014 $149,630 
Electronic Materials228,820 270,836 
Precision Optics26,692 28,579 
Other — 
Total$442,526 $449,045 
Less: pass-through metal costs
Performance Materials$19,004 $20,512 
Electronic Materials124,942 168,604 
Precision Optics22 49 
Other 756 
Total$143,968 $189,921 
Value-added sales
Performance Materials$168,010 $129,118 
Electronic Materials103,878 102,232 
Precision Optics26,670 28,530 
Other (756)
Total$298,558 $259,124 
Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
The cost of gold, silver, platinum, palladium, copper, ruthenium, iridium, rhodium, rhenium, and osmium can be quite volatile. Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.
Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.
By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals.


Segment Results




2324




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.
The primary measurement used by management to measure the financial performance of each segment is EBITDA. Refer to Note B to the Consolidated Financial Statements for the reconciliation of EBITDA by segment to consolidated net income.

Performance Alloys and CompositesMaterials
ThirdFirst Quarter
 Third Quarter Ended First Quarter Ended
 Sept. 29, Sept. 30, $ %March 31,April 1,$%
(Thousands) 2017 2016 Change Change(Thousands)20232022ChangeChange
Net sales $109,393
 $103,699
 $5,694
 5%Net sales$187,014 $149,630 $37,384 25 %
Value-added sales 90,637
 87,247
 3,390
 4%Value-added sales168,010 129,118 38,892 30 %
Operating profit 6,786
 4,357
 2,429
 56%
EBITDAEBITDA42,770 24,792 17,978 73 %
Net sales from the Performance Alloys and CompositesMaterials segment of $109.4$187.0 million in the thirdfirst quarter of 2017 were 5% higher than2023 increased 25% compared to net sales of $103.7$149.6 million in the thirdfirst quarter of 2016 primarily2022. The increase in sales was due to higher volume in the aerospace and defense (24%), energy (25%) and automotive (14%) end markets as well as $36.2 million of incremental sales from the clad strip project, slightly offset by a $8.9 million year over year decrease in the volume relatedof raw material beryllium hydroxide sales compared to the industrial components, consumer electronics, and automotive electronics end markets. In addition, the impactfirst quarter of higher pass-through metal prices favorably impacted net sales by approximately $1.8 million.2022.
Value-added sales of $90.6$168.0 million in the thirdfirst quarter of 20172023 were 4%30% higher than value-added sales of $87.2$129.1 million in the thirdfirst quarter of 2016.2022. 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 $42.8 million in the thirdfirst quarter of 20172023 compared to $4.4$24.8 million in the thirdfirst quarter of 2016.2022. The increase in operating profitEBITDA was primarily due to higherthe same factors driving the increase in net sales volume, favorable product mix,as well as a lower merger and productivity improvements.acquisition costs of $2.7 million compared to the first quarter of 2022. In addition, we recorded a portion of the expected $8 million annual benefit from the production credit in the first quarter of 2023 which favorably impacted EBITDA. See Note E to the Consolidated Financial Statements for further discussion.


Nine Months
Electronic Materials
  Nine Months Ended
  Sept. 29, Sept. 30, $ %
(Thousands) 2017 2016 Change Change
Net sales $310,487
 $292,024
 $18,463
 6%
Value-added sales 262,534
 248,799
 13,735
 6%
Operating profit 12,523
 6,103
 6,420
 105%
First Quarter
 First Quarter Ended
March 31,April 1,$%
(Thousands)20232022ChangeChange
Net sales$228,820 $270,836 $(42,016)(16)%
Value-added sales103,878 102,232 1,646 %
EBITDA13,955 12,148 1,807 15 %
Net sales from the Performance Alloys and CompositesElectronic Materials segment of $310.5$228.8 million in the first nine monthsquarter of 2017 were 6% higher than2023 decreased 16% from net sales of $292.0$270.8 million in the first nine monthsquarter of 20162022. The decrease in net sales was primarily due to increased demandlower precious metal sales volumes in the industrial componentssemiconductor (16%) and consumer electronicsenergy (14%) end markets. The impact of higherAdditionally, pass-through metal prices favorably impactedprice reductions reduced net sales by approximately $5.9 million.
Value-added sales of $262.5 million in the first nine 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$3.6 million compared to the first nine monthsquarter of 2016. Also,2022.
Despite the increasedecrease in sales, 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 $12.5were up slightly to $103.9 million in the first nine monthsquarter of 20172023, compared to $6.1value-added sales of $102.2 million in the first nine monthsquarter of 2016.2022, representing an increase of 2%, due to an increase in non-precious metal sales, primarily in tantalum shipments.
EBITDA for the Electronic Materials segment was $14.0 million in the first quarter of 2023 compared to $12.1 million in the first quarter of 2022. The increase in operating profit wasEBITDA is primarily due to higher sales volume, favorable product mix, and productivity improvements.




24



Advancedno HCS-Electronic 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 acquisition costs recorded in the thirdcurrent period, compared to $6.0 million recorded in the first 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 volume2022. This was partially offset by mix, year over year tantalum costs increases and 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 millionproduction late in the first nine monthsquarter of 2017 were 31% higher than net sales of $328.9 million2023 resulting 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.manufacturing cost inefficiencies.
Value-added sales of $169.7 million in the first nine months of 2017 were 26% higher than value-added sales of $135.0 million in the first nine months of 2016. This increase included value-added sales of $24.9 million attributable to our HTB acquisition. The increase in value-added sales was also driven by higher value-added sales to the consumer electronics end market. Value-added sales to the consumer electronics end market, which represents approximately 49% of total segment value-added sales, increased $7.2 million due primarily to higher demand, excluding the HTB acquisition.
The Advanced Materials segment generated operating profit of $24.9 million in the first nine months of 2017 compared to $20.7 million in the first nine months of 2016. As a percentage of value-added sales, operating profit was 15% in the first nine months of both 2017 and 2016. Operating profit in the first nine months of 2017 was favorably impacted by higher sales volume.







25




Precision CoatingsOptics
ThirdFirst Quarter
(Thousands)
Third Quarter Ended(Thousands)First Quarter Ended
Sept. 29,
Sept. 30, $ %March 31,April 1,$%
2017
2016 Change Change20232022ChangeChange
Net sales
$27,105

$38,670
 (11,565) (30)%Net sales$26,692 $28,579 $(1,887)(7)%
Value-added sales
21,896

25,803
 (3,907) (15)%Value-added sales26,670 28,530 (1,860)(7)%
Operating profit
1,613

3,432
 (1,819) (53)%
EBITDAEBITDA2,692 2,191 501 23 %
Net sales from the Precision CoatingsOptics segment of $27.1$26.7 million in the thirdfirst quarter of 2017 were 30% lower than2023 decreased 7% compared to net sales of $38.7$28.6 million in the thirdfirst quarter of 20162022. The decrease was primarily due to lower sales volume.volumes in the consumer electronics end market (39%).
Value-added sales of $21.9 million in the third quarter of 2017 were 15% lower than value-added sales of $25.8 million in the third quarter of 2016. The defense and industrial components end markets increased $1.3 million primarily due to end market demand. This increase was more than offset by a decrease of $4.9 million in the medical end market due to lower volume in the blood glucose test strip segment of the medical end market.
The Precision Coatings segment generated operating profit of $1.6 million in the third quarter of 2017, compared to an operating profit of $3.4 million in the third quarter of 2016. The decrease in operating profit was driven by lower sales volume and $0.4 million of cost reduction initiatives, primarily severance, associated with reducing headcount in Asia and North America.
Nine Months
(Thousands) Nine Months Ended
Sept. 29, Sept. 30, $ %
2017 2016 Change Change
Net sales $90,742
 $113,955
 (23,213) (20)%
Value-added sales 67,810
 75,548
 (7,738) (10)%
Operating profit 6,145
 9,803
 (3,658) (37)%
Net sales from the Precision Coatings segment of $90.7$26.7 million in the first nine monthsquarter of 2017 were 20% lower than net2023 decreased 7% compared to value-added sales of $114.0$28.5 million in the first nine monthsquarter of 2016 primarily2022. The decrease in value-added sales was due to lower sales volume.the same factors driving the decrease in net sales.
Value-added sales of $67.8EBITDA for the Precision Optics segment was $2.7 million in the first nine monthsquarter of 2017 were 10% lower than value-added sales2023, compared to EBITDA of $75.5$2.2 million in the first nine monthsquarter of 2016.2022. The defense and industrial components end markets increased $3.6 millionincrease in EBITDA was primarily due to stronger end market demand. This increase was more than offsetdriven 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 million in the first nine months of 2017 compared to $9.8 million in the first nine months of 2016. The decrease in operating profit in the first nine months of 2017 versus the comparable period of 2016 was due to lower sales volume,targeted cost reduction initiatives of $0.4 million, and the absence of a gain on the sale of equipment of $0.8 million realized during the first nine months of 2016.spend control.



26




Other
ThirdFirst Quarter
(Thousands) Third Quarter Ended(Thousands)First Quarter Ended
Sept. 29, Sept. 30, $ %March 31,April 1,$%
2017 2016 Change Change20232022ChangeChange
Net sales $
 $
 
  %Net sales$ $— $— — %
Value-added sales (1,542) (2,009) 467
 (23)%Value-added sales (756)756 (100)%
Operating loss (6,597) (5,883) (714) 12 %
EBITDAEBITDA(6,655)(5,177)(1,478)29 %
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs of $6.6were $6.7 million in the thirdfirst quarter of 2017 increased $0.7 million as2023 compared to $5.9$5.2 million in the thirdfirst quarter of 2016.2022. Corporate costs were 4%accounted for 2% of total CompanyCompany-wide value-added sales in the thirdfirst quarter of both 20172023 and 2016.2022. 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 monthsquarter of 2017 increased $5.6 million as2023 compared to $13.2 million in the first nine monthsquarter of 2016. As a percent2022 is is reflective of total Company value-added sales, corporateinvestments to execute our strategic initiatives and variable costs 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.improved financial performance.




26


FINANCIAL POSITION
Cash Flow
A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows:
 Three Months Ended
March 31,April 1,$
(Thousands)20232022Change
Net cash (used in) provided by operating activities$38,105 $(14,304)$52,409 
Net cash used in investing activities(29,802)(18,966)(10,836)
Net cash provided by financing activities(6,291)39,305 (45,596)
Effects of exchange rate changes130 (260)390 
Net change in cash and cash equivalents$2,142 $5,775 $(3,633)
  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$38.1 million in the first ninethree months of 2017 versus $27.22023 compared to net cash used in operating activities of $14.3 million in the comparable prior-year period. Working capital requirements used cash of $13.5$6.4 million in the first quarter of 2023 compared to $47.4 million during the first ninethree months of 2017 compared to a use of $18.7 million2022. The decrease in the first nine months of 2016. Cash flowscash 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)working capital 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 million compared to a use of $2.2 million in the prior-year period primarily due to a higher accounts payable balance due to the timing of paymentsstronger cash collection and the HTB acquisition.continued inventory management.



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Net cash used in investing activities was $34.8$29.8 million in the first nine monthsquarter of 20172023 compared to $27.6$19.0 million in the prior-year period, reflecting a $16.5 million payment for the HTB acquisition offset by lower payments for property, plant, and equipment and mine development of $10.6 million.period. The increase in cash used in investing activities is due to increased capital expenditures, as expected, to support continued business growth.
Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2017,2023, 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 inby financing activities totaled $10.9$6.3 million in the first ninethree months of 2017 versus $8.62023 compared to net cash provided by financing activities of $39.3 million in the comparable prior-year periodperiod. The net financing cash outflow in 2023 was primarily due to a higher amount of common shares withheld for taxes in 2017debt repayments, compared to 2016.financing used to support continued business growth.


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 2022 Annual Report on Form 10-K.

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,March 31, 2023, cash and cash equivalents held by our foreign operations totaled $11.5$14.0 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.


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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, 2017March 31, 2023 and December 31, 20162022 is as follows:
 September 29, December 31, March 31,December 31,
(Thousands) 2017 2016(Thousands)20232022
Cash and cash equivalentsCash and cash equivalents$15,243 $13,101 
Total outstanding debt $4,007
 $4,615
Total outstanding debt433,209 431,981 
Cash 22,486
 31,464
Net debt (cash) (18,479) (26,849)
Net debtNet debt$(417,966)$(418,880)
Available borrowing capacity $266,405
 $238,886
Available borrowing capacity$186,788 $185,294 
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 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,January 2023, we entered into an amendment toamended the agreement governing our $375.0 million revolving credit agreementfacility (Credit Agreement). Pursuant to the amendment, we transitioned U.S. dollar denominated borrowings from LIBOR to SOFR for both the revolving credit agreement and the term loan and increased the cap on precious metals consignment line from $600 million to $615 million.
The amendment extendsCompany had previously amended and restated the Credit Agreement in connection with the HCS-Electronic Materials acquisition in November 2021. A $300 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 LIBORSOFR, following the January 2023 amendment, 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 chargeinterest coverage ratio. We were in compliance with all of our debt covenants as of September 29, 2017March 31, 2023 and December 31, 2016.2022. Cash on hand does not affectup to $25 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 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103 million of borrowings under its amended revolving credit facility. The interest rate for the term loan is based on SOFR, following the January 2023 amendment, 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 metal requirements.owned by precious metal consignors as we manufacture product for our customers. Metal is purchased from the precious metal consignor 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. AsIn August 2022, we entered into a result, weprecious metals consignment agreement, maturing on August 31, 2025, which replaced the consignment agreements that would have negotiated increases in the available capacity under existing lines, added additional lines, and extended the maturity dates of existing lines in recent years.matured on August 27, 2022. The available and unused capacity under the metal financing linesconsignment agreements expiring in August 2025 totaled approximately $149.3$247.5 million as of September 29, 2017.March 31, 2023, compared to $241.9 million as of December 31, 2022. The availability is determined by Board approved levels and actual line capacity.


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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 thirdfirst quarter of 2017.2023. Since the approval of the repurchase plan, we have purchased 1,082,2641,254,264 shares at a total cost of $34.3 million.$41.7 million, or an average of $33.23 per share.
In the third quarter and first nine months of 2017, weWe paid cash dividends of $2.0$2.6 million and $5.9 million, respectively, on our common stock.stock in the first quarter of 2023. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We maintain the majority of the precious metals and 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$367.5 million and $373.1 million as of September 29, 2017, versus $194.8 million as ofMarch 31, 2023 and December 31, 2016.2022, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of September 29, 2017 and DecemberMarch 31, 2016.2023. For additional information on our contractual and other obligations, refer to our Form 10-K for the year ended December 31, 2016.

CRITICAL ACCOUNTING POLICIES

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 our2022 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 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; 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, 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 conflict between Russia and Ukraine; realization of expected financial benefits expected from the Inflation Reduction Act of 2022;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 2022 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 2022 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 2022 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, 2017March 31, 2023 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.March 31, 2023.
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, 2017March 31, 2023 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 March 31, 2023, our subsidiary, Materion Brush Inc., was a defendant in one beryllium case. 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 herein by reference.dismiss 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. Amended scheduling orders were entered on April 8, 2022, August 4, 2022, and November 1, 2022 that likewise did not set a trial date. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

No beryllium cases were filed in the first quarter of 2023.

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. On August 2, 2022, the Court conditionally certified a class of employees at the Company’s Elmore facility only and rejected certification of a class across the Company’s other facilities.
In November 2022, the parties reached a settlement for an immaterial amount. The Court preliminarily approved the settlement on March 30, 2023 and set a final approval hearing for July 2023.



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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 us during the three months ended September 29, 2017March 31, 2023.
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 ShareTotal 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)
January 1 through February 3, 2023
— $— — $8,316,239 
February 4 through March 3, 2023
26,823 107.67 — 8,316,239 
March 4 through March 31, 20236,529 111.23 — 8,316,239 
Total33,352 $108.37 — $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 awardsstock appreciation rights issued under the Company's stock incentive plan.

(2)


(2)On January 14, 2014, we announced that our Board of Directors had authorized the repurchase of up to $50.0 million of our common stock. WeDuring the three months ended March 31, 2023 we did not repurchase any shares under this program during the third quarter of 2017.program. As of September 29, 2017, $15.7March 31, 2023 $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.
4.4
10.1
10.2
10.3
10.4
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*March 31, 2023*
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: May 3, 2023
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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