UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q

(Mark One)

☒



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

For the quarterly period ended ~~March 29,~~June 28, 2019

☐



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

For the transition period from to

Commission file number 001-15885

MATERION CORPORATION

(Exact name of Registrant as specified in charter)



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

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

6070 Parkland Blvd., Mayfield Heights, Ohio44124

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:

~~216-486-4200~~(216)-486-4200

Securities registered pursuant to Section 12(b) of the Act:



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yesþ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ Accelerated filer ¨



~~Large accelerated filer~~ þ			~~Accelerated filer~~ ¨
~~Non-accelerated filer~~ ¨			~~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

~~Securities registered pursuant to Section 12(b) of the Act:~~



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

Number of Shares of Common Stock, without par value, outstanding at ~~March 29,~~June 28, 2019: ~~20,354,680.~~20,399,425.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	First Quarter Ended				Second Quarter Ended				Six Months Ended
(Thousands, except per share amounts)	March 29, 2019		March 30, 2018		June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Net sales	$	301,441	$	303,467	$	297,843	$	309,085	$	599,284	$	612,552
Cost of sales	232,129		245,187		228,249		247,247		460,378		492,434
Gross margin	69,312		58,280		69,594		61,838		138,906		120,118
Selling, general, and administrative expense	40,064		38,462		39,891		38,473		79,955		76,935
Research and development expense	3,740		3,643		4,062		3,860		7,802		7,503
Other—net	4,121		2,924		2,891		4,313		7,012		7,237
Operating profit	21,387		13,251		22,750		15,192		44,137		28,443
Interest expense—net	466		730		500		667		966		1,397
Other non-operating expense—net	245		442		3,112		437		3,357		879
Income before income taxes	20,676		12,079		19,138		14,088		39,814		26,167
Income tax expense	3,770		1,515		3,598		2,944		7,368		4,459
Net income	$	16,906	$	10,564	$	15,540	$	11,144	$	32,446	$	21,708
Basic earnings per share:
Net income per share of common stock	$	0.83	$	0.52	$	0.76	$	0.55	$	1.60	$	1.08
Diluted earnings per share:
Net income per share of common stock	$	0.82	$	0.51	$	0.75	$	0.54	$	1.57	$	1.05
Weighted-average number of shares of common stock outstanding:
Basic	20,267		20,135		20,383		20,221		20,326		20,178
Diluted	20,606		20,574		20,666		20,593		20,635		20,583

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


	First Quarter Ended						Second Quarter Ended						Six Months Ended
	March 29,			March 30,			June 28,			June 29,			June 28,			June 29,
(Thousands)	2019			2018			2019			2018			2019			2018
Net income	$	16,906		$	10,564		$	15,540		$	11,144		$	32,446		$	21,708
Other comprehensive income (loss):
Foreign currency translation adjustment	(503		)	1,113			339			(944		)	(164		)	169
Derivative and hedging activity, net of tax	927			(675		)	(1,000		)	1,763			(73		)	1,088
Pension and post-employment benefit adjustment, net of tax	540			1,278			13,953			1,296			14,493			2,574
Other comprehensive income	964			1,716			13,292			2,115			14,256			3,831
Comprehensive income	$	17,870		$	12,280		$	28,832		$	13,259		$	46,702		$	25,539

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets



	(Unaudited)
	June 28,			Dec. 31,
(Thousands)	2019			2018
Assets
Current assets
Cash and cash equivalents	$	74,856		$	70,645
Accounts receivable	142,327			130,538
Inventories, net	213,329			214,871
Prepaid and other current assets	23,904			23,299
Total current assets	454,416			439,353
Deferred income taxes	1,052			5,616
Property, plant, and equipment	913,325			898,251
Less allowances for depreciation, depletion, and amortization	(669,861		)	(647,233		)
Property, plant, and equipment—net	243,464			251,018
Operating lease, right-of-use asset	26,788			—
Intangible assets	5,213			6,461
Other assets	15,280			7,236
Goodwill	90,633			90,657
Total Assets	$	836,846		$	800,341
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt	$	847		$	823
Accounts payable	41,658			49,622
Salaries and wages	36,250			47,501
Other liabilities and accrued items	38,482			33,301
Income taxes	1,971			2,615
Unearned revenue	5,829			5,918
Total current liabilities	125,037			139,780
Other long-term liabilities	11,419			14,764
Operating lease liabilities	21,118			—
Finance lease liabilities	18,325			15,221
Retirement and post-employment benefits	30,663			38,853
Unearned income	30,354			32,563
Long-term income taxes	3,093			2,993
Deferred income taxes	383			195
Long-term debt	1,669			2,066
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—			—
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at June 28 and December 31)	245,785			234,704
Retained earnings	576,211			548,374
Common stock in treasury	(187,224		)	(175,426		)
Accumulated other comprehensive loss	(43,978		)	(58,234		)
Other equity	3,991			4,488
Total shareholders' equity	594,785			553,906
Total Liabilities and Shareholders’ Equity	$	836,846		$	800,341

(Unaudited)
March 29, Dec. 31,
(Thousands) 2019 2018
Assets
Current assets
Cash and cash equivalents $ 41,864
$ 70,645
Accounts receivable 144,952
130,538
Inventories, net 224,198
214,871
Prepaid and other current assets 23,832
23,299
Total current assets 434,846
439,353
Deferred income taxes 5,301
5,616
Property, plant, and equipment 908,481
898,251
Less allowances for depreciation, depletion, and amortization (656,326 ) (647,233 )
Property, plant, and equipment—net 252,155
251,018
Operating lease, right-of-use asset 28,327
—
Intangible assets 5,808
6,461
Other assets 7,725
7,236
Goodwill 90,600
90,657
Total Assets $ 824,762
$ 800,341
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt $ 836
$ 823
Accounts payable 56,586
49,622
Salaries and wages 24,435
47,501
Other liabilities and accrued items 38,228
33,301
Income taxes

5,877
2,615
Unearned revenue 5,194
5,918
Total current liabilities 131,156
139,780
Other long-term liabilities 11,231
14,764
Operating lease liabilities 22,575
—
Finance lease liabilities 18,502
15,221
Retirement and post-employment benefits 37,813
38,853
Unearned income 31,478
32,563
Long-term income taxes 3,067
2,993
Deferred income taxes 194
195
Long-term debt 1,869
2,066
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued) —
—
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at March 29 and December 31) 241,480
234,704
Retained earnings 562,941
548,374
Common stock in treasury (184,812 ) (175,426 )
Accumulated other comprehensive loss (57,270 ) (58,234 )
Other equity 4,538
4,488
Total shareholders' equity 566,877
553,906
Total Liabilities and Shareholders’ Equity $ 824,762
$ 800,341

See the notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended						Six Months Ended
	March 29,			March 30,			June 28,			June 29,
(Thousands)	2019			2018			2019			2018
Cash flows from operating activities:
Net income	$	16,906		$	10,564		$	32,446		$	21,708
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization	9,067			9,207			22,607			18,349
Amortization of deferred financing costs in interest expense	236			261			472			514
Stock-based compensation expense (non-cash)	1,547			771			3,541			2,164
Deferred income tax expense (benefit)	371			(359		)
Deferred income tax expense							4,578			429
Pension curtailment charge							3,296			—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable	(14,698		)	(8,582		)	(11,778		)	(12,060		)
Decrease (increase) in inventory	(9,561		)	5,097			1,306			10,428
Decrease (increase) in prepaid and other current assets	(556		)	(634		)	(588		)	4,928
Increase (decrease) in accounts payable and accrued expenses	(16,030		)	(16,308		)	(18,813		)	(14,189		)
Increase (decrease) in unearned revenue							(88		)	2,132
Increase (decrease) in interest and taxes payable	2,525			1,626			(1,130		)	2,084
Domestic pension plan contributions	(1,500		)	(9,000		)	(3,000		)	(13,000		)
Other-net	(924		)	(818		)	(2,803		)	5,817
Net cash used in operating activities	(12,617		)	(8,175		)
Net cash provided by operating activities							30,046			29,304
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment	(8,027		)	(7,867		)	(13,833		)	(17,153		)
Payments for mine development	(1,352		)	(1,661		)	(1,591		)	(3,425		)
Proceeds from sale of property, plant, and equipment	58			3			15			27
Net cash used in investing activities	(9,321		)	(9,525		)	(15,409		)	(20,551		)
Cash flows from financing activities:
Repayment of long-term debt	(197		)	(190		)	(397		)	(383		)
Principal payments under finance lease obligations	(298		)	(211		)	(599		)	(425		)
Cash dividends paid	(2,125		)	(2,012		)	(4,368		)	(4,137		)
Repurchase of common stock	(199		)	—			(199		)	—
Payments of withholding taxes for stock-based compensation awards	(3,978		)	(2,133		)	(4,763		)	(2,765		)
Net cash used in financing activities	(6,797		)	(4,546		)	(10,326		)	(7,710		)
Effects of exchange rate changes	(46		)	608			(100		)	8
Net change in cash and cash equivalents	(28,781		)	(21,638		)	4,211			1,051
Cash and cash equivalents at beginning of period	70,645			41,844			70,645			41,844
Cash and cash equivalents at end of period	$	41,864		$	20,206		$	74,856		$	42,895

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity

(Unaudited)


	Common Shares				Shareholders' Equity																	Common Shares				Shareholders' Equity
(Thousands, except per share amounts)	Common Shares		Common Shares Held in Treasury		Common Stock		Retained Earnings			Common Stock In Treasury			Accumulated Other Comprehensive Income (Loss)			Other Equity			Total			Common Shares		Common Shares Held in Treasury		Common Stock		Retained Earnings			Common Stock in Treasury			Accumulated Other Comprehensive Income (Loss)			Other Equity			Total
Balance at December 31, 2018	20,242		(6,906	)	$	234,704	$	548,374		$	(175,426	)	$	(58,234	)	$	4,488		$	553,906
Balance at March 29, 2019																						20,354		(6,794	)	$	241,480	$	562,941		$	(184,812	)	$	(57,270	)	$	4,538		$	566,877
Net income	—		—		—		16,906			—			—			—			16,906			—		—		—		15,540			—			—			—			15,540
Other comprehensive income (loss)	—		—		—		—			—			964			—			964			—		—		—		—			—			9,996			—			9,996
Pension curtailment																						—		—		—		—			—			3,296			—			3,296
Cash dividends declared ($0.11 per share)																						—		—		—		(2,243		)	—			—			—			(2,243		)
Stock-based compensation activity																						55		55		4,287		(27		)	(2,266		)	—			—			1,994
Payments of withholding taxes for stock-based compensation awards																						(12	)	(12	)	—		—			(785		)	—			—			(785		)
Repurchase of shares																						—		—		—		—			—			—			—			—
Directors’ deferred compensation																						2		2		18		—			639			—			(547		)	110
Balance at June 28, 2019																						20,399		(6,749	)	$	245,785	$	576,211		$	(187,224	)	$	(43,978	)	$	3,991		$	594,785

Balance at March 30, 2018																						20,191		(6,958	)	$	227,694	$	545,093		$	(171,574	)	$	(101,221	)	$	4,337		$	504,329
Net income																						—		—		—		11,144			—			—			—			11,144
Other comprehensive income (loss)																						—		—		—		—			—			1,540			—			1,540
Tax Cuts and Jobs Act Reclassification																						—		—		—		(575		)	—			575			—			—
Cumulative effect of accounting change	—		—		—		(179		)	—			—			—			(179		)	—		—		—		—			—			—			—			—
Cash dividends declared ($0.105 per share)	—		—		—		(2,125		)	—			—			—			(2,125		)	—		—		—		(2,125		)	—			—			—			(2,125		)
Stock-based compensation activity	192		192		6,759		(35		)	(5,177		)	—			—			1,547			55		55		3,020		(14		)	(1,613		)	—			—			1,393
Payments of withholding taxes for stock-based compensation awards	(75	)	(75	)	—		—			(3,978		)	—			—			(3,978		)	(11	)	(11	)	—		—			(632		)	—			—			(632		)
Repurchase of shares	(5	)	(5	)	—		—			(199		)	—			—			(199		)
Directors’ deferred compensation	—		—		17		—			(32		)	—			50			35			1		2		49		—			(6		)	—			49			92
Balance at March 29, 2019	20,354		(6,794	)	$	241,480	$	562,941		$	(184,812	)	$	(57,270	)	$	4,538		$	566,877

Balance at December 31, 2017	20,107		(7,042	)	$	223,484	$	536,116		$	(166,128	)	$	(102,937	)	$	4,446		$	494,981
Net income	—		—		—		10,564			—			—			—			10,564
Other comprehensive income (loss)	—		—		—		—			—			1,716			—			1,716
Cumulative effect of accounting change	—		—		—		425			—			—			—			425
Cash dividends declared ($0.10 per share)	—		—		—		(2,012		)	—			—			—			(2,012		)
Stock-based compensation activity	126		126		4,200		—			(3,429		)	—			—			771
Payments of withholding taxes for stock-based compensation awards	(42	)	(42	)	—		—			(2,133		)	—			—			(2,133		)
Directors’ deferred compensation	—		—		10		—			116			—			(109		)	17
Balance at March 30, 2018	20,191		(6,958	)	$	227,694	$	545,093		$	(171,574	)	$	(101,221	)	$	4,337		$	504,329
Balance at June 29, 2018																						20,236		(6,912	)	$	230,763	$	553,523		$	(173,825	)	$	(99,106	)	$	4,386		$	515,741



	Common Shares				Shareholders' Equity
(Thousands, except per share amounts)	Common Shares		Common Shares Held in Treasury		Common Stock		Retained Earnings			Common Stock in Treasury			Accumulated Other Comprehensive Income (Loss)			Other Equity			Total
Balance at December 31, 2018	20,242		(6,906	)	$	234,704	$	548,374		$	(175,426	)	$	(58,234	)	$	4,488		$	553,906
Net income	—		—		—		32,446			—			—			—			32,446
Other comprehensive income (loss)	—		—		—		—			—			10,960			—			10,960
Pension curtailment	—		—		—		—			—			3,296			—			3,296
Cumulative effect of accounting change	—		—		—		(179		)	—			—			—			(179		)
Cash dividends declared ($0.215 per share)	—		—		—		(4,368		)	—			—			—			(4,368		)
Stock-based compensation activity	247		247		11,046		(62		)	(7,443		)	—			—			3,541
Payments of withholding taxes for stock-based compensation awards	(87	)	(87	)	—		—			(4,763		)	—			—			(4,763		)
Repurchase of shares	(5	)	(5	)	—		—			(199		)	—			—			(199		)
Directors’ deferred compensation	2		2		35		—			607			—			(497		)	145
Balance at June 28, 2019	20,399		(6,749	)	$	245,785	$	576,211		$	(187,224	)	$	(43,978	)	$	3,991		$	594,785

Balance at December 31, 2017	20,107		(7,042	)	$	223,484	$	536,116		$	(166,128	)	$	(102,937	)	$	4,446		$	494,981
Net income	—		—		—		21,708			—			—			—			21,708
Other comprehensive income (loss)	—		—		—		—			—			3,256			—			3,256
Tax Cuts and Jobs Act Reclassification	—		—		—		(575		)	—			575			—			—
Cumulative effect of accounting change	—		—		—		425			—			—			—			425
Cash dividends declared ($0.205 per share)	—		—		—		(4,137		)	—			—			—			(4,137		)
Stock-based compensation activity	181		181		7,220		(14		)	(5,042		)	—			—			2,164
Payments of withholding taxes for stock-based compensation awards	(53	)	(53	)	—		—			(2,765		)	—			—			(2,765		)
Directors’ deferred compensation	1		2		59		—			110			—			(60		)	109
Balance at June 29, 2018	20,236		(6,912	)	$	230,763	$	553,523		$	(173,825	)	$	(99,106	)	$	4,386		$	515,741

See notes to these consolidated financial statements.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note A — Accounting Policies

Basis of Presentation: In management’s opinion, the accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature. Certain amounts in prior periods have been reclassified to conform to the 2019 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 2018 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.

New Pronouncements Adopted: In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 (Topic 842), Leases, which eliminates the off-balance-sheet accounting for leases. This guidance requires lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The Company adopted this guidance as of January 1, 2019 using the modified retrospective method and applied it retrospectively through a cumulative-effect adjustment to retained earnings. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification, and initial direct costs of leases commencing before this ASU's effective date; however, the Company did not elect the hindsight transitional practical expedient. The Company also applied the practical expedient to not separate lease and non-lease components to new leases as well as existing leases through transition. The Company made an accounting policy election not to apply recognition requirements of the guidance to short-term leases.

Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.

The Company recorded a net reduction to opening retained earnings of $0.2 million as of January 1, 2019 due to the cumulative impact of adopting Topic 842, with the impact primarily related to derecognition of a built-to-suit lease. Refer to Note H for additional disclosures relating to the Company's leasing arrangements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The Company adopted this guidance as of January 1, 2019, and the adoption did not have a material effect on the Company’s consolidated financial statements.

New Pronouncements Issued: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. This ASU requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company is currently assessing the effect that this ASU will have on its financial position, results of operations, and disclosures.

No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

Note B — Segment Reporting

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

Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, beryllia ceramics, and bulk metallic glass materials.

Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.

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

The Other reportable segment includes unallocated corporate costs and assets.



(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other			Total
Second Quarter 2019
Net sales	$	135,231	$	133,238	$	29,374	$	—		$	297,843
Intersegment sales	6		19,260		—		—			19,266
Operating profit (loss)	19,328		6,139		3,937		(6,654		)	22,750
Second Quarter 2018
Net sales	$	129,765	$	150,324	$	28,996	$	—		$	309,085
Intersegment sales	3		11,400		—		—			11,403
Operating profit (loss)	12,309		5,572		2,233		(4,922		)	15,192

First Six Months 2019
Net sales	$	262,344	$	277,263	$	59,677	$	—		$	599,284
Intersegment sales	15		36,473		—		—			36,488
Operating profit (loss)	38,286		13,219		6,014		(13,382		)	44,137
First Six Months 2018
Net sales	$	248,001	$	303,869	$	60,682	$	—		$	612,552
Intersegment sales	31		23,052		—		—			23,083
Operating profit (loss)	22,170		11,470		5,608		(10,805		)	28,443

(Thousands)
Performance
Alloys and
Composites
Advanced Materials Precision Coatings Other Total
First Quarter 2019
Net sales $ 127,113
$ 144,025
$ 30,303
$ —
$ 301,441
Intersegment sales
9
17,213
—
—
17,222
Operating profit (loss) 18,958
7,080
2,077
(6,728 ) 21,387
First Quarter 2018
Net sales $ 118,236
$ 153,545
$ 31,686
$ —
$ 303,467
Intersegment sales 28
11,652
—
—
11,680
Operating profit (loss) 9,861
5,898
3,375
(5,883 ) 13,251

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

The following table disaggregates revenue for each segment by end market for the second quarter and first ~~quarter~~six months of 2019 and ~~2018:~~

2018, respectively:



(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
Second Quarter 2019
End Market
Semiconductor	$	1,303	$	100,758	$	93	$	—	$	102,154
Industrial	28,585		7,704		3,842		—		40,131
Aerospace and Defense	26,046		1,125		4,750		—		31,921
Consumer Electronics	22,663		500		4,430		—		27,593
Automotive	16,564		1,669		365		—		18,598
Energy	11,303		16,027		—		—		27,330
Telecom and Data Center	18,244		713		—		—		18,957
Other	10,523		4,742		15,894		—		31,159
Total	$	135,231	$	133,238	$	29,374	$	—	$	297,843

Second Quarter 2018
End Market
Semiconductor	$	1,299	$	118,525	$	428	$	—	$	120,252
Industrial	28,974		7,951		3,171		—		40,096
Aerospace and Defense	25,964		1,010		4,960		—		31,934
Consumer Electronics	16,150		174		5,021		—		21,345
Automotive	23,236		1,804		469		—		25,509
Energy	9,825		12,069		—		—		21,894
Telecom and Data Center	17,784		566		—		—		18,350
Other	6,533		8,225		14,947		—		29,705
Total	$	129,765	$	150,324	$	28,996	$	—	$	309,085

(Thousands) Performance Alloys and Composites Advanced Materials Precision Coatings Other Total
First Quarter 2019
End Market
Consumer Electronics $ 23,210
$ 73,700
$ 3,734
$ —
$ 100,644
Industrial Components 23,850
11,136
2,995
—
37,981
Energy 12,409
23,559
—
—
35,968
Automotive Electronics 18,144
—
—
—
18,144
Defense 12,722
4,764
5,260
—
22,746
Medical 2,760
4,871
17,019
—
24,650
Telecom Infrastructure 10,123
6,466
—
—
16,589
Other 23,895
19,529
1,295
—
44,719
Total $ 127,113
$ 144,025
$ 30,303
$ —
$ 301,441

First Quarter 2018
End Market
Consumer Electronics $ 25,358
$ 82,050
$ 4,279
$ —
$ 111,687
Industrial Components 28,521
13,299
2,492
—
44,312
Energy 7,804
23,436
—
—
31,240
Automotive Electronics 18,970
—
222
—
19,192
Defense 6,622
4,485
4,315
—
15,422
Medical 1,743
4,409
19,070
—
25,222
Telecom Infrastructure 8,094
7,357
59
—
15,510
Other 21,124
18,509
1,249
—
40,882
Total $ 118,236
$ 153,545
$ 31,686
$ —
$ 303,467



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

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

Intersegment sales are eliminated in consolidation.

Note C — Revenue Recognition

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

Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at ~~March 29,~~June 28, 2019. Remaining performance obligations include noncancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the practical expedient at ~~March 29,~~June 28, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$26.6 million, of which $7.4 million will be recognized in 2019.~~$19.6 million.

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

(Thousands) March 29, 2019 December 31, 2018 $ change % change
Accounts receivable, trade $ 138,498
$ 124,498
$ 14,000
11 %
Unbilled receivables 6,027
4,619
1,408
30 %
Unearned revenue 5,194
5,918
(724 ) (12 )%

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

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

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized ~~$3.0~~approximately $5.0 million of the unearned amounts as revenue during the first ~~quarter~~six months of 2019.

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

Note D — Other-net

Other-net expense for the second quarter and first ~~quarter~~six months of of 2019 and 2018 is summarized as follows:



	Second Quarter Ended						Six Months Ended
	June 28,			June 29,			June 28,			June 29,
(Thousands)	2019			2018			2019			2018
Metal consignment fees	$	2,225		$	2,588		$	5,316		$	5,017
Amortization of intangible assets	368			561			758			1,334
Foreign currency loss	307			1,230			384			1,219
Net loss (gain) on disposal of fixed assets	118			(3		)	142			23
Rental income	(29		)	(134		)	(58		)	(260		)
Other items	(98		)	71			470			(96		)
Total	$	2,891		$	4,313		$	7,012		$	7,237

First Quarter Ended
March 29, March 30,
(Thousands) 2019 2018
Metal consignment fees $ 3,091
$ 2,429
Amortization of intangible assets 390
773
Foreign currency loss (gain) 77
(11 )
Net loss on disposal of fixed assets 24
26
Rental income (29 ) (126 )
Other items 568
(167 )
Total $ 4,121
$ 2,924

Note E — Income Taxes

The Company's effective tax rate for the ~~three-month periods ended March 29,~~second quarter of 2019 and ~~March 30,~~ 2018 was ~~18.2%~~18.8% and ~~12.5%~~20.9%, respectively, and 18.5% and 17.0% for the first six months of 2019 and 2018, respectively. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Additionally, the effective tax rate for ~~both periods~~the first six months of 2019 included a net discrete income tax ~~benefits~~benefit of ~~$0.9~~$0.5 million, primarily related to excess tax benefits from stock-based ~~compensation in 2019 and~~compensation. The effective tax rate for the first six months of 2018 included a net discrete income tax benefit of $1.0 million, primarily related to Staff Accounting Bulletin (SAB) No. 118 ~~adjustments in 2018.~~adjustments.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note F — Earnings Per Share (EPS)

The following table sets forth the computation of basic and diluted EPS:



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

First Quarter Ended
March 29, March 30,
(Thousands, except per share amounts) 2019 2018
Numerator for basic and diluted EPS:
Net income $ 16,906
$ 10,564
Denominator:
Denominator for basic EPS:
Weighted-average shares outstanding 20,267
20,135
Effect of dilutive securities:
Stock appreciation rights 107
203
Restricted stock units 83
98
Performance-based restricted stock units 149
138
Diluted potential common shares 339
439
Denominator for diluted EPS:

Adjusted weighted-average shares outstanding 20,606
20,574
Basic EPS $ 0.83
$ 0.52
Diluted EPS $ 0.82
$ 0.51

Securities totaling ~~201,394~~84,509 and 65,112 for the quarters ended ~~March 29,~~June 28, 2019 and ~~March 30,~~June 29, 2018, respectively, and 144,154 and 65,112 for the six months ended June 28, 2019 and June 29, 2018, respectively, were excluded from the dilution calculation as their effect would have been anti-dilutive.

Note G — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:



	June 28,		December 31,
(Thousands)	2019		2018
Raw materials and supplies	$	38,425	$	33,182
Work in process	190,428		195,879
Finished goods	32,062		30,643
Subtotal	$	260,915	$	259,704
Less: LIFO reserve balance	47,586		44,833
Inventories	$	213,329	$	214,871

March 29, December 31,
(Thousands) 2019 2018
Raw materials and supplies $ 38,002
$ 33,182
Work in process 194,548
195,879
Finished goods 36,838
30,643
Subtotal $ 269,388
$ 259,704
Less: LIFO reserve balance 45,190
44,833
Inventories $ 224,198
$ 214,871
The liquidation of last in, first out (LIFO) inventory layers increased cost of sales by $0.1 million in the second quarter and first six months of both 2019 and 2018.

The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$276.3~~$295.7 million as of ~~March 29,~~June 28, 2019 versus $316.1 million as of December 31, 2018.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note H — Leases

The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years. Several operating lease agreements contain options to extend the lease term and/or options for early termination. The lease term consists of the non-cancelable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. The weighted average remaining lease term for the Company's operating and finance leases as of ~~March 29,~~June 28, 2019 was ~~5.12~~5.09 years and ~~19.75~~19.87 years, respectively.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

The discount rate implicit within the leases is generally not determinable, and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for leases is determined based on the lease term in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure the Company's operating and finance lease liabilities as of ~~March 29,~~June 28, 2019 was ~~5.38%~~5.55% and 5.31%, respectively.

The components of operating and finance lease cost for the second quarter and first ~~quarter~~six months of 2019 were as follows:



	Second Quarter Ended		Six Months Ended
	June 28,		June 28,
(Thousands)	2019		2019
Components of lease expense
Operating lease cost	$	2,291	$	5,003

Finance lease cost
Amortization of right-of-use assets	354		710
Interest on lease liabilities	259		522
Total lease cost	$	2,904	$	6,235

First Quarter Ended
March 29,
(Thousands) 2019
Components of lease expense
Operating lease cost $ 2,712

Finance lease cost
Amortization of right-of-use assets 356
Interest on lease liabilities 263
Total lease cost $ 3,331

Operating lease expense amounted to ~~$2.7~~$2.3 million and $3.0 million during the second quarter of 2019 and 2018, respectively, and $5.0 million and $6.1 million during the first ~~quarter~~six months of 2019 and 2018, respectively. The Company straight-lines its expense of fixed payments for operating leases over the lease term and expenses the variable lease payments in the period incurred. These variable lease payments are not included in the calculation of right-of-use assets or lease liabilities.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Supplemental balance sheet information related to the Company's operating and finance leases as of ~~March 29,~~June 28, 2019 was as follows:



	June 28,
(Thousands)	2019
Supplemental balance sheet information

Operating Leases
Operating lease right-of-use assets	$	26,788
Other liabilities and accrued items	6,927
Operating lease liabilities	21,118

Finance Leases
Property, plant, and equipment	$	26,330
Allowances for depreciation, depletion, and amortization	(3,140		)
Finance lease assets, net	$	23,190
Other liabilities and accrued items	$	1,238
Finance lease liabilities	18,325
Total principal payable on finance leases	$	19,563

March 29,
(Thousands) 2019
Supplemental balance sheet information

Operating Leases
Operating lease right-of-use assets $ 28,327
Other liabilities and accrued items 7,190
Operating lease liabilities 22,575

Finance Leases
Property, plant, and equipment $ 26,185
Allowances for depreciation, depletion, and amortization (2,906 )
Finance lease assets, net $ 23,279
Other liabilities and accrued items $ 1,218
Finance lease liabilities 18,502
Total principal payable on finance leases $ 19,720

Future maturities of the Company's lease liabilities as of June 28, 2019 are as follows:



	Finance		Operating
(Thousands)	Leases		Leases
2019	$	1,122	$	4,201
2020	2,244		7,618
2021	2,244		6,619
2022	2,244		4,727
2023	1,534		3,818
2024 and thereafter	22,414		5,148
Total lease payments	31,802		32,131
Less amount of lease payment representing interest	12,239		4,086
Total present value of lease payments	$	19,563	$	28,045

12Supplemental cash flow information related to leases for the first six months of 2019 was as follows:



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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

~~Future maturities of the Company's lease liabilities as of March 29, 2019 are as follows:~~

Finance Operating
(Thousands) Leases Leases
2019 $ 1,675
$ 6,296
2020 2,234
7,614
2021 2,234
6,629
2022 2,234
4,737
2023 1,524
3,825
2024 and thereafter 22,212
5,153
Total lease payments 32,113
34,254
Less amount of lease payment representing interest 12,393
4,489
Total present value of lease payments

$ 19,720
$ 29,765

~~Supplemental cash flow information related to leases for the first quarter of 2019 was as follows:~~

First Quarter Ended
March 29,
(Thousands) 2019
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 3,779
Operating cash flows from finance leases 263
Financing cash flows from finance leases 298

Note I — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the ~~first~~second quarter of 2019 and 2018 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan.



	Pension Benefits						Other Benefits
	Second Quarter Ended						Second Quarter Ended
	June 28,			June 29,			June 28,			June 29,
(Thousands)	2019			2018			2019			2018
Components of net periodic benefit cost (benefit)
Service cost	$	1,418		$	1,674		$	18		$	28
Interest cost	1,347			2,397			99			99
Expected return on plan assets	(2,167		)	(3,697		)	—			—
Amortization of prior service benefit	122			(30		)	(375		)	(374		)
Amortization of net loss (gain)	627			1,959			(23		)	—
Pension curtailment charge	3,296			—			—			—
Net periodic benefit cost (benefit)	$	4,643		$	2,303		$	(281	)	$	(247	)


	Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
	First Quarter Ended						First Quarter Ended						Six Months Ended						Six Months Ended
	March 29,			March 30,			March 29,			March 30,			June 28,			June 29,			June 28,			June 29,
(Thousands)	2019			2018			2019			2018			2019			2018			2019			2018
Components of net periodic benefit cost (benefit)
Service cost	$	1,340		$	1,674		$	17		$	28		$	2,758		$	3,348		$	35		$	56
Interest cost	1,557			2,397			100			99			2,904			4,794			199			198
Expected return on plan assets	(2,123		)	(3,697		)	—			—			(4,290		)	(7,394		)	—			—
Amortization of prior service benefit	120			(31		)	(374		)	(374		)	242			(61		)	(749		)	(749		)
Amortization of net loss (gain)	804			1,960			(23		)	—			1,431			3,919			(46		)	—
Pension curtailment charge													3,296			—			—			—
Net periodic benefit cost (benefit)	$	1,698		$	2,303		$	(280	)	$	(247	)	$	6,341		$	4,606		$	(561	)	$	(495	)

The Company made contributions to the domestic defined benefit pension plan of ~~$1.5~~$3.0 million and ~~$9.0~~$13.0 million in the ~~first quarter~~six months of 2019 and 2018, respectively.

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 expenses.

In May 2019, the Company's Board of Directors approved changes to the U.S. defined benefit pension plan. The Company will freeze the pay and service amounts used to calculate pension benefits for active participants in the pension plan as of January 1, 2020. The Company recognized a non-cash pre-tax pension curtailment charge of $3.3 million associated with the plan amendment during the second quarter of 2019.

1314

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note J — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the second quarter of 2019 and 2018 and first ~~quarter~~six months of 2019 and 2018 are as follows:



	Gains and Losses on Cash Flow Hedges
(Thousands)	Foreign Currency			Precious Metals			Copper			Total			Pension and Post-Employment Benefits			Foreign Currency Translation			Total
Balance at March 29, 2019	$	1,663		$	(24	)	$	189		$	1,828		$	(54,003	)	$	(5,095	)	$	(57,270	)
Other comprehensive income before reclassifications	(269		)	(563		)	(580		)	(1,412		)	14,224			339			13,151
Amounts reclassified from accumulated other comprehensive income	(46		)	(1		)	163			116			3,781			—			3,897
Net current period other comprehensive income (loss) before tax	(315		)	(564		)	(417		)	(1,296		)	18,005			339			17,048
Deferred taxes	(72		)	(130		)	(94		)	(296		)	4,052			—			3,756
Net current period other comprehensive income (loss) after tax	(243		)	(434		)	(323		)	(1,000		)	13,953			339			13,292
Balance at June 28, 2019	$	1,420		$	(458	)	$	(134	)	$	828		$	(40,050	)	$	(4,756	)	$	(43,978	)

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Gains and Losses on Cash Flow Hedges
(Thousands) Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total
Balance at December 31, 2018
$ 1,263

$ 79

$ (441 ) $ 901

$ (54,543 )
$ (4,592 )
$ (58,234 )
Other comprehensive income before reclassifications
517

(73 )
884
1,328

—

(503 )
825
Amounts reclassified from accumulated other comprehensive income
2

(61 )
(71 ) (130 )
660

—

530
Net current period other comprehensive income (loss) before tax
519

(134 )
813
1,198

660

(503 )
1,355
Deferred taxes
119

(31 )
183
271

120

—

391
Net current period other comprehensive income (loss) after tax
400

(103 )
630
927

540

(503 )
964
Balance at March 29, 2019
$ 1,663

$ (24 )
$ 189
$ 1,828

$ (54,003 )
$ (5,095 )
$ (57,270 )

Balance at December 31, 2017 $ 959
$ (196 ) $ —
$ 763
$ (99,592 ) $ (4,108 ) $ (102,937 )
Other comprehensive income (loss) before reclassifications (1,198 ) (191 ) —
(1,389 ) —
1,113
(276 )
Amounts reclassified from accumulated other comprehensive income 377
136
—
513
1,626
—
2,139
Net current period other comprehensive income (loss) before tax (821 ) (55 ) —
(876 ) 1,626
1,113
1,863
Deferred taxes (188 ) (13 ) —
(201 ) 348
—
147
Net current period other comprehensive income (loss) after tax (633 ) (42 ) —
(675 ) 1,278
1,113
1,716
Balance at March 30, 2018 $ 326
$ (238 ) $ —
$ 88
$ (98,314 ) $ (2,995 ) $ (101,221 )



	Gains and Losses on Cash Flow Hedges
(Thousands)	Foreign Currency			Precious Metals			Copper			Total			Pension and Post-Employment Benefits			Foreign Currency Translation			Total
Balance at December 31, 2018	$	1,263		$	79		$	(441	)	$	901		$	(54,543	)	$	(4,592	)	$	(58,234	)
Other comprehensive income before reclassifications	248			(636		)	304			(84		)	14,224			(164		)	13,976
Amounts reclassified from accumulated other comprehensive income	(44		)	(62		)	92			(14		)	4,441			—			4,427
Net current period other comprehensive income (loss) before tax	204			(698		)	396			(98		)	18,665			(164		)	18,403
Deferred taxes	47			(161		)	89			(25		)	4,172			—			4,147
Net current period other comprehensive income (loss) after tax	157			(537		)	307			(73		)	14,493			(164		)	14,256
Balance at June 28, 2019	$	1,420		$	(458	)	$	(134	)	$	828		$	(40,050	)	$	(4,756	)	$	(43,978	)

Balance at December 31, 2017	$	959		$	(196	)	$	—		$	763		$	(99,592	)	$	(4,108	)	$	(102,937	)
Other comprehensive income (loss) before reclassifications	(327		)	444			—			117			—			169			286
Amounts reclassified from accumulated other comprehensive income	419			159			—			578			3,248			—			3,826
Net current period other comprehensive income (loss) before tax	92			603			—			695			3,248			169			4,112
Deferred taxes	(531		)	138			—			(393		)	674			—			281
Net current period other comprehensive income (loss) after tax	623			465			—			1,088			2,574			169			3,831
Balance at June 29, 2018	$	1,582		$	269		$	—		$	1,851		$	(97,018	)	$	(3,939	)	$	(99,106	)

Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of Income. Reclassifications from accumulated other comprehensive income of gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note M for additional details on cash flow hedges.

Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note I for additional details on pension and post-employment expenses.

1416

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note K — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $3.5 million and $6.2 million in the second quarter and first six months of 2019, respectively, compared to $2.7 million and ~~$2.5~~$5.2 million in ~~the first quarter~~same periods of ~~2019 and 2018, respectively.~~2018.

The Company granted 73,461 stock appreciation rights (SARs) to certain employees during the first ~~quarter~~six months of 2019. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ~~three~~six months ended ~~March 29,~~June 28, 2019 were $58.30 and $17.76, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:



Risk-free interest rate	2.47	%
Dividend yield	0.7	%
Volatility	31.7	%
Expected term (in years)	5.2

The Company granted 63,665 stock-settled restricted stock units (RSUs) to certain employees and 11,048 stock-settled RSUs to non-employee directors during the first ~~three~~six months of 2019. The Company measures the fair value of stock-settled RSUs based on the closing market price of a share of Materion common stock on the date of the grant. The weighted-average fair value per share was $58.30 and $68.79 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the ~~three~~six months ended ~~March 29, 2019.~~June 28, 2019. RSUs are expensed over the vesting period of three ~~years.~~years for employees and one year for non-employee directors.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first ~~three~~six months of 2019. The weighted-average fair value of the stock-settled PRSUs was $69.84 per share and will be expensed over the vesting period of three years. The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and the total return to shareholders over the vesting period relative to a peer group’s performance over the same period.

At ~~March 29,~~June 28, 2019, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately ~~$14.9~~$13.6 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note L — Fair Value of Financial Instruments

The Company measures and records financial instruments at fair value. A fair value hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 — Quoted market prices in active markets for identical assets and liabilities;

Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

1517

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of ~~March 29,~~June 28, 2019 and December 31, 2018:




(Thousands)	Total Carrying Value in the Consolidated Balance Sheets				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
(Thousands)	2019		2018		2019		2018		2019		2018		2019		2018
Financial Assets
Deferred compensation investments	$	3,121	$	2,156	$	3,121	$	2,156	$	—	$	—	$	—	$	—
Foreign currency forward contracts	119		246		—		—		119		246		—		—
Precious metal swaps	—		237		—		—		—		237		—		—
Copper swaps	9		—		—		—		9		—		—		—
Total	$	3,249	$	2,639	$	3,121	$	2,156	$	128	$	483	$	—	$	—
Financial Liabilities
Deferred compensation liability	$	3,121	$	2,156	$	3,121	$	2,156	$	—	$	—	$	—	$	—
Foreign currency forward contracts	121		432		—		—		121		432		—		—
Precious metal swaps	596		135		—		—		596		135		—		—
Copper swaps	182		569		—		—		182		569		—		—
Total	$	4,020	$	3,292	$	3,121	$	2,156	$	899	$	1,136	$	—	$	—

(Thousands) Total Carrying Value in the Consolidated Balance Sheets
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
2019 2018 2019 2018 2019 2018 2019 2018
Financial Assets
Deferred compensation investments $ 2,915
$ 2,156
$ 2,915
$ 2,156
$ —
$ —
$ —
$ —
Foreign currency forward contracts 495
246
—
—
495
246
—
—
Precious metal swaps 112
237
—
—
112
237
—
—
Copper swaps 273
—
—
—
273
—
—
—
Total $ 3,795
$ 2,639
$ 2,915
$ 2,156
$ 880
$ 483

$ —

$ —
Financial Liabilities
Deferred compensation liability $ 2,915
$ 2,156
$ 2,915
$ 2,156
$ —
$ —
$ —
$ —
Foreign currency forward contracts 136
432
—
—
136
432
—
—
Precious metal swaps 144
135
—
—
144
135
—
—
Copper swaps 29
569
—
—
29
569
—
—
Total $ 3,224
$ 3,292
$ 2,915
$ 2,156
$ 309
$ 1,136
$ —
$ —

The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of ~~March 29,~~June 28, 2019 and December 31, 2018.

Note M — Derivative Instruments and Hedging Activity

The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows:

Foreign Currency. The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, hedge contracts may limit the benefits from a weakening U.S. dollar.

The use of forward contracts locks in a firm rate and eliminates any downside risk from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.

The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets,

1618

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

forecasts, and other internal data, and determines the timing, amounts, and instruments to use to hedge that exposure within the confines of the policy. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Hedge contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of rate movements.

Precious Metals. The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer, and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions that charge the Company a financing fee based upon the current value of the metal on hand.

In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.

The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal.

In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment. The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure.

The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.

Copper. We also use copper in our production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time our price exposure to copper is generally in balance, there can be a lag between the change in our cost and the pass-through to our customers, resulting in higher or lower margins in a given period. To mitigate this impact, we hedge a portion of this pricing risk.

The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held until maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses currency hedge contracts that are denominated in the same currency as the underlying exposure and precious metal hedge contracts denominated in the same metal as the underlying exposure.

All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.

1719

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of ~~March 29,~~June 28, 2019 and December 31, 2018:



	June 28, 2019				December 31, 2018
(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Foreign currency forward contracts - euro
Prepaid expenses	$	2,421	$	27	$	8,767	$	244
Other liabilities and accrued items	3,836		52		8,771		249

March 29, 2019 December 31, 2018
(Thousands)
Notional
Amount

Fair
Value

Notional
Amount

Fair
Value
Foreign currency forward contracts - euro
Prepaid expenses $ 4,379
$ 154
$ 8,767
$ 244
Other liabilities and accrued items 3,514
133
8,771
249

These outstanding foreign currency derivatives were related to intercompany loans. Other-net included no foreign currency impact relating to these derivatives during both the second quarter and the first ~~quarter~~six months of 2019 and included ~~$0.5~~$1.6 million and $1.1 million of foreign currency ~~losses~~gains during the second quarter and first ~~quarter~~six months of ~~2018.~~2018, respectively.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of ~~March 29,~~June 28, 2019 and December 31, 2018:



	June 28, 2019				December 31, 2018
(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Prepaid expenses
Foreign currency forward contracts - yen	$	1,465	$	9	$	—	$	—
Foreign currency forward contracts - euro	7,475		83		725		2
Precious metal swaps	—		—		4,533		237
Copper swaps	977		9		—		—
Total	9,917		101		5,258		239

Other liabilities and accrued items
Foreign currency forward contracts - yen	2,065		35		1,264		17
Foreign currency forward contracts - euro	7,459		34		19,158		166
Precious metal swaps	6,828		573		2,864		135
Copper swaps	4,359		182		11,170		569
Total	20,711		824		34,456		887

Other long-term liabilities
Precious metal swaps	697		23		—		—
Total	$	31,325	$	746	$	39,714	$	648

March 29, 2019 December 31, 2018
(Thousands)
Notional
Amount

Fair
Value

Notional
Amount

Fair
Value
Prepaid expenses
Foreign currency forward contracts - yen $ 2,081
$ 60
$ —
$ —
Foreign currency forward contracts - euro 14,922
270
725
2
Precious metal swaps 3,374
112
4,533
237
Copper swaps 5,123
273
—
—
Total 25,500
715
5,258
239

Other assets
Foreign currency forward contracts - euro 553
11
—
—
Total 553
11
—
—

Other liabilities and accrued items
Foreign currency forward contracts - yen 823
1
1,264
17
Foreign currency forward contracts - euro 1,236
2
19,158
166
Precious metal swaps 3,134
144
2,864
135
Copper swaps 2,372
29
11,170
569
Total 7,565
176
34,456
887

Total $ 33,618
$ 550
$ 39,714
$ 648

All of these contracts were designated and effective as cash flow hedges. The Company expects to relieve substantially the entire balance in OCI as of ~~March 29,~~June 28, 2019 to the Consolidated Statements of Income within the next 15-month period. Refer to Note J for additional OCI details.

1820

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification as of ~~March 29,~~the second quarter and first six months of of 2019:



		Second Quarter Ended			Six Months ended
(Thousands)		June 28, 2019			June 28, 2019
Hedging relationship	Line item
Foreign currency forward contracts	Net sales	(46		)	(44		)
Precious metal swaps	Cost of sales	(1		)	(62		)
Copper swaps	Cost of sales	163			92
Total		$	116		$	(14	)

First Quarter Ended
March 29,
(Thousands) 2019
Hedging relationship Line item
Foreign currency forward contracts - yen Net sales $ 8
Foreign currency forward contracts - euro Net sales (6 )
Precious metal swaps Cost of sales (61 )
Copper swaps Cost of sales (71 )
Total $ (130 )

Note N — Contingencies

Legal Proceedings. For information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note S ("Contingencies and Commitments") in the Company's 2018 Annual Report on Form 10-K.

Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

Environmental Proceedings. The Company has an active environmental compliance program and records reserves for the probable cost of identified environmental remediation projects. The reserves are established based upon analyses conducted by the Company’s engineers and outside consultants and are adjusted from time to time based upon ongoing studies, the difference between actual and estimated costs, and other factors. The reserves may also be affected by rulings and negotiations with regulatory agencies. The undiscounted reserve balance was ~~$6.4~~$6.2 million and $6.5 million at ~~March 29,~~June 28, 2019 and December 31, 2018, respectively. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.



Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications. Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, ~~industrial components, defense, medical, automotive electronics, telecommunications infrastructure,~~ energy, ~~commercial aerospace, science, services,~~ and ~~appliance.~~telecom and data center.

1921

RESULTS OF OPERATIONS

~~First~~Second Quarter


	First Quarter Ended											Second Quarter Ended
	March 29,			March 30,			$			%		June 28,			June 29,			$			%
(Thousands, except per share data)	2019			2018			Change			Change		2019			2018			Change			Change
Net sales	$	301,441		$	303,467		$	(2,026	)	(1	)%	$	297,843		$	309,085		$	(11,242	)	(4	)%
Value-added sales	187,681			181,313			6,368			4	%	194,896			189,902			4,994			3	%
Gross margin	69,312			58,280			11,032			19	%	69,594			61,838			7,756			13	%
Gross margin as a % of value-added sales	37		%	32		%	N/A			N/A		36		%	33		%	N/A			N/A
Selling, general, and administrative (SG&A) expense	40,064			38,462			1,602			4	%	39,891			38,473			1,418			4	%
SG&A expense as a % of value-added sales	21		%	21		%	N/A			N/A		20		%	20		%	N/A			N/A
Research and development (R&D) expense	3,740			3,643			97			3	%	4,062			3,860			202			5	%
R&D expense as a % of value-added sales	2		%	2		%	N/A			N/A		2		%	2		%	N/A			N/A
Other—net	4,121			2,924			1,197			41	%	2,891			4,313			(1,422		)	(33	)%
Operating profit	21,387			13,251			8,136			61	%	22,750			15,192			7,558			50	%
Interest expense—net	466			730			(264		)	(36	)%	500			667			(167		)	(25	)%
Other non-operating expense—net	245			442			(197		)	(45	)%	3,112			437			2,675			612	%
Income before income taxes	20,676			12,079			8,597			71	%	19,138			14,088			5,050			36	%
Income tax expense	3,770			1,515			2,255			149	%	3,598			2,944			654			22	%
Net income	$	16,906		$	10,564		$	6,342		60	%	$	15,540		$	11,144		$	4,396		39	%

Diluted earnings per share	$	0.82		$	0.51		$	0.31		61	%	$	0.75		$	0.54		$	0.21		39	%

N/A = Not Applicable

Net sales of ~~$301.4~~$297.8 million in the ~~first~~second quarter of 2019 decreased ~~$2.1~~$11.2 million from ~~$303.5~~$309.1 million recorded in the ~~first~~second quarter of 2018. Net sales growth in our Performance Alloys and Composites ~~segment~~and Precision Coatings segments was more than offset by decreased net sales in our Advanced Materials ~~and Precision Coatings segments~~segment driven by a lower mix of precious ~~metal prices~~metal-containing products and the mix of customer-supplied material. The change in precious metal and copper prices unfavorably impacted net sales during the ~~first~~second quarter of 2019 by ~~$6.4~~$0.8 million.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal ~~prices.~~prices and changes in mix due to customer-supplied material. Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein. Value-added sales of ~~$187.7~~$194.9 million in the ~~first~~second quarter of 2019 increased ~~$6.4~~$5.0 million, or 4%3%, compared to the ~~first~~second quarter of 2018. The increase in value-added sales was primarily driven by commercial excellence initiatives and stronger demand in the ~~defense,~~ energy, industrial, and ~~telecom infrastructure~~consumer electronics end markets.

Gross margin in the ~~first~~second quarter of 2019 was ~~$69.3~~$69.6 million, or ~~$11.0~~$7.8 million higher than the ~~$58.3~~$61.8 million gross margin recorded during the ~~first~~second quarter of 2018. Gross margin expressed as a percentage of value-added sales increased to ~~37%~~36% in the ~~first~~second quarter of 2019 from ~~32%~~33% in the ~~first~~second quarter of 2018 primarily due to a combination of higher sales volume and improved sales mix from both an end market and ~~geographic perspective.~~product perspective and improved manufacturing performance.

SG&A expense was ~~$40.1~~$39.9 million in the ~~first~~second quarter of 2019, compared to $38.5 million recorded in the ~~first~~second quarter of 2018. The increase in SG&A expense for the ~~first~~second quarter of 2019 was primarily driven by investments to execute ~~our~~ strategic ~~initiatives and variable costs associated with driving top-line and profit growth.~~initiatives. Expressed as a percentage of value-added sales, SG&A expense was ~~21%~~20% in the ~~first~~second quarter of both 2019 and 2018.

R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D expense was flat as a percentage of value-added sales at approximately 2% in the ~~first~~second quarter of both 2019 and 2018.

Other-net was ~~$4.1~~$2.9 million of expense in the ~~first~~second quarter of 2019, or a ~~$1.2~~$1.4 million ~~increase~~decrease from the ~~first~~second quarter of 2018. The decrease in Other-net was primarily due to less foreign exchange losses recognized in the second quarter of 2019 compared to the second quarter of 2018. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.

2022

Interest expense-net was $0.5 million and $0.7 million in the ~~first~~second quarter of 2019 and 2018, respectively.

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

Income tax expensefor the ~~first~~second quarter of 2019 was ~~$3.8~~$3.6 million compared to ~~$1.5~~$2.9 million in the ~~first~~second quarter of 2018. The effective tax rate for the ~~first~~second quarter of 2019 was ~~18.2%~~18.8% compared to an effective tax rate of ~~12.5%~~20.9% in the prior-year period. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit.

Six Months



	Six Months Ended
	June 28,			June 29,			$			%
(Thousands, except per share data)	2019			2018			Change			Change
Net sales	$	599,284		$	612,552		$	(13,268	)	(2	)%
Value-added sales	382,577			371,215			11,362			3	%
Gross margin	138,906			120,118			18,788			16	%
Gross margin as a % of value-added sales	36		%	32		%	N/A			N/A
SG&A expense	79,955			76,935			3,020			4	%
SG&A expense as a % of value-added sales	21		%	21		%	N/A			N/A
R&D expense	7,802			7,503			299			4	%
R&D expense as a % of value-added sales	2		%	2		%	N/A			N/A
Other—net	7,012			7,237			(225		)	(3	)%
Operating profit	44,137			28,443			15,694			55	%
Interest expense—net	966			1,397			(431		)	(31	)%
Other non-operating expense—net	3,357			879			2,478			282	%
Income before income taxes	39,814			26,167			13,647			52	%
Income tax expense	7,368			4,459			2,909			65	%
Net income	$	32,446		$	21,708		$	10,738		49	%

Diluted earnings per share	$	1.57		$	1.05		$	0.52		50	%

N/A = Not Applicable

Net sales of $599.3 million in the first six months of 2019 decreased $13.3 million from $612.6 million recorded in the first six months of 2018. Net sales growth in our Performance Alloys and Composites segment was more than offset by decreased net sales in our Advanced Materials and Precision Coatings segments primarily driven by lower mix of precious metal-containing products and the mix of customer-supplied material. The change in precious metal and copper prices unfavorably impacted net sales during the first half of 2019 by $5.0 million.

Value-added sales of $382.6 million in the first half of 2019 increased $11.4 million, or 3%, compared to the first half of 2018. The increase in value-added sales was primarily driven by commercial excellence initiatives and stronger demand in the aerospace and defense, energy, telecom and data center, and industrial end markets.

Gross margin in the first half of 2019 was $138.9 million, or $18.8 million higher than the $120.1 million gross margin recorded during the first half of 2018. Gross margin expressed as a percentage of value-added sales increased to 36% in the first six months of 2019 from 32% in the first six months of 2018 primarily due to a combination of improved sales mix from both an end market and product perspective and improved manufacturing performance.

SG&A expense was $80.0 million in the first six months of 2019, compared to $76.9 million recorded in the first six months of 2018. The increase in SG&A expense for the first half of 2019 was primarily driven by investments to execute strategic initiatives for commercial excellence and variable costs associated with driving top-line and profit growth. Expressed as a percentage of value-added sales, SG&A expense was 21% in the first half of both 2019 and 2018.

R&D expense was flat as a percentage of value-added sales at approximately 2% in the first half of both 2019 and 2018.

Other-net was $7.0 million of expense in the first six months of 2019, or a $0.2 million decrease from the first six months of 2018. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.

Interest expense-net was $1.0 million and $1.4 million in the first six months of 2019 and 2018, respectively.

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

Income tax expensefor the first six months of 2019 was $7.4 million, compared to $4.5 million in the first six months of 2018. The effective tax rate for the first half of 2019 was 18.5% compared to an effective tax rate of 17.0% in the prior-year period. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Additionally, the effective tax rate for ~~both periods~~2019 included a net discrete income tax ~~benefits~~benefit of ~~$0.9~~$0.5 million, primarily related to excess tax benefits from stock-based ~~compensation in 2019 and~~compensation. The effective tax rate for 2018 included a net discrete income tax benefit of $1.0 million, primarily related to Staff Accounting Bulletin No. 118 ~~adjustments in 2018.~~adjustments.

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

A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the second quarter and first ~~quarter~~six months of 2019 and 2018 is as follows:


	First Quarter Ended						Second Quarter Ended						Six Months Ended
	March 29,			March 30,			June 28,			June 29,			June 28,			June 29,
(Thousands)	2019			2018			2019			2018			2019			2018
Net sales
Performance Alloys and Composites	$	127,113		$	118,236		$	135,231		$	129,765		$	262,344		$	248,001
Advanced Materials	144,025			153,545			133,238			150,324			277,263			303,869
Precision Coatings	30,303			31,686			29,374			28,996			59,677			60,682
Other	—			—			—			—			—			—
Total	$	301,441		$	303,467		$	297,843		$	309,085		$	599,284		$	612,552

Less: pass-through metal costs
Performance Alloys and Composites	$	17,512		$	17,937		$	19,988		$	19,615		$	37,500		$	37,552
Advanced Materials	86,518			95,262			74,931			93,057			161,449			188,319
Precision Coatings	7,766			8,045			6,285			5,603			14,051			13,648
Other	1,964			910			1,743			908			3,707			1,818
Total	$	113,760		$	122,154		$	102,947		$	119,183		$	216,707		$	241,337

Value-added sales
Performance Alloys and Composites	$	109,601		$	100,299		$	115,243		$	110,150		$	224,844		$	210,449
Advanced Materials	57,507			58,283			58,307			57,267			115,814			115,550
Precision Coatings	22,537			23,641			23,089			23,393			45,626			47,034
Other	(1,964		)	(910		)	(1,743		)	(908		)	(3,707		)	(1,818		)
Total	$	187,681		$	181,313		$	194,896		$	189,902		$	382,577		$	371,215

The cost of gold, silver, platinum, palladium, and copper can be quite volatile. Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.

Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll

basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.

By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals.

Segment Results

The Company consists of four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Other reportable segment includes unallocated corporate costs.

Performance Alloys and Composites

~~First~~Second Quarter


	First Quarter Ended								Second Quarter Ended
	March 29,		March 30,		$		%		June 28,		June 29,		$		%
(Thousands)	2019		2018		Change		Change		2019		2018		Change		Change
Net sales	$	127,113	$	118,236	$	8,877	8	%	$	135,231	$	129,765	$	5,466	4	%
Value-added sales	109,601		100,299		9,302		9	%	115,243		110,150		5,093		5	%
Operating profit	18,958		9,861		9,097		92	%	19,328		12,309		7,019		57	%

Net sales from the Performance Alloys and Composites segment of ~~$127.1~~$135.2 million in the ~~first~~second quarter of 2019 were 8%4% higher than net sales of ~~$118.2~~$129.8 million in the ~~first~~second quarter of 2018. ~~Sales volume growth~~Improved sales mix more than offset the unfavorable impact of pass-through metal prices of approximately ~~$1.6~~$0.6 million.

Value-added sales of ~~$109.6~~$115.2 million in the ~~first~~second quarter of 2019 were 9%5% higher than value-added sales of ~~$100.3~~$110.2 million in the ~~first~~second quarter of 2018. The increase in value-added sales was driven by performance improvements in commercial execution ~~and stronger demand~~ in the end markets of ~~defense,~~consumer electronics, energy, and telecom ~~infrastructure.~~and data center.

Performance Alloys and Composites generated operating profit of ~~$19.0~~$19.3 million in the ~~first~~second quarter of 2019 compared to ~~$9.9~~$12.3 million in the ~~first~~second quarter of 2018. The increase in operating profit was primarily due to ~~higher sales volume,~~ favorable product mix and improved manufacturing performance.

Six Months



	Six Months Ended
	June 28,		June 29,		$		%
(Thousands)	2019		2018		Change		Change
Net sales	$	262,344	$	248,001	$	14,343	6	%
Value-added sales	224,844		210,449		14,395		7	%
Operating profit	38,286		22,170		16,116		73	%

Net sales from the Performance Alloys and Composites segment of $262.3 million in the first six months of 2019 were 6% higher than net sales of $248.0 million in the first six months of 2018. Improved sales mix more than offset the unfavorable impact of pass-through metal prices of approximately $2.1 million.

Value-added sales of $224.8 million in the first six months of 2019 were 7% higher than value-added sales of $210.4 million in the first six months of 2018. The increase in value-added sales was driven by performance improvements in commercial execution in the end markets of aerospace and defense, energy, and telecom and data center.

Performance Alloys and Composites generated operating profit of $38.3 million in the first six months of 2019 compared to $22.2 million in the first six months of 2018. The increase in operating profit was primarily due to favorable product mix and improved manufacturing performance.

Advanced Materials

~~First~~Second Quarter


	First Quarter Ended								Second Quarter Ended
	March 29,		March 30,		$		%		June 28,		June 29,		$		%
(Thousands)	2019		2018		Change		Change		2019		2018		Change		Change
Net sales	$	144,025	$	153,545	(9,520	)	(6	)%	$	133,238	$	150,324	(17,086	)	(11	)%
Value-added sales	57,507		58,283		(776	)	(1	)%	58,307		57,267		1,040		2	%
Operating profit	7,080		5,898		1,182		20	%	6,139		5,572		567		10	%

Net sales from the Advanced Materials segment of ~~$144.0~~$133.2 million in the ~~first~~second quarter of 2019 were 6%11% lower than net sales of ~~$153.5~~$150.3 million in the ~~first~~second quarter of 2018. The decline in net sales was due to the lower mix of precious metal-containing products and the mix of customer-supplied material, as well as the impact of unfavorable pass-through metal prices of ~~$6.1 million, as well as lower sales volume.~~$1.4 million.

Value-added ~~sales of $57.5 million in the first quarter of 2019 were 1% lower than value-added~~ sales of $58.3 million in the ~~first~~second quarter of 2019 were 2% higher than value-added sales of $57.3 million in the second quarter of 2018. Value-added sales into the ~~energy, consumer electronics,~~industrial and ~~industrial components~~energy end markets ~~decreased $3.4 million, while sales into~~contributed to the ~~medical~~year-over-year increase, and more than offset softer demand in the semiconductor end ~~market increased $1.1 million.~~market.

The Advanced Materials segment generated operating profit of ~~$7.1~~$6.1 million in the ~~first~~second quarter of 2019 compared to ~~$5.9~~$5.6 million in the ~~first~~second quarter of 2018. Increased operating profit in the ~~first~~second quarter of 2019, compared to 2018, was the result of cost savings realized primarily from ~~operational improvements and~~ restructuring actions taken in the fourth quarter of ~~2018.~~2018, partially offset by reduced manufacturing yields.

Advanced Materials

Six Months



	Six Months Ended
	June 28,		June 29,		$		%
(Thousands)	2019		2018		Change		Change
Net sales	$	277,263	$	303,869	(26,606	)	(9	)%
Value-added sales	115,814		115,550		264		—	%
Operating profit	13,219		11,470		1,749		15	%

22Net sales from the Advanced Materials segment of $277.3 million in the first six months of 2019 were 9% lower than net sales of $303.9 million in the first six months of 2018. The decline in net sales was due to the lower mix of precious metal-containing products and the mix of customer-supplied material, as well as the impact of unfavorable pass-through metal prices of $5.3 million.

Value-added sales of $115.8 million in the first six months of 2019 were up slightly, compared to value-added sales of $115.6 million in the first six months of 2018. Increased value-added sales into the industrial end market were offset by decreased value-added sales into the semiconductor end market.

The Advanced Materials segment generated operating profit of $13.2 million in the first six months of 2019 compared to $11.5 million in the first six months of 2018. Increased operating profit in the first six months of 2019, compared to 2018, was the result of cost savings realized primarily from restructuring actions taken in the fourth quarter of 2018, partially offset by reduced manufacturing yields.

Precision Coatings

~~First~~Second Quarter


(Thousands)	First Quarter Ended								Second Quarter Ended
	March 29,		March 30,		$		%		June 28,		June 29,		$		%
	2019		2018		Change		Change		2019		2018		Change		Change
Net sales	$	30,303	$	31,686	(1,383	)	(4	)%	$	29,374	$	28,996	378		1	%
Value-added sales	22,537		23,641		(1,104	)	(5	)%	23,089		23,393		(304	)	(1	)%
Operating profit	2,077		3,375		(1,298	)	(38	)%	3,937		2,233		1,704		76	%

Net sales from the Precision Coatings segment of ~~$30.3~~$29.4 million in the ~~first~~second quarter of 2019 ~~decreased 4%~~increased 1% compared to net sales of ~~$31.7~~$29.0 million in the ~~first~~second quarter of 2018 primarily due to the favorable impact of pass-through precious metal prices of $1.2 million, partially offset by reduced sales ~~volume in the medical and consumer electronics end markets.~~volume.

Value-added sales of ~~$22.5~~$23.1 million in the ~~first~~second quarter of 2019 decreased 5%1% compared to value-added sales of ~~$23.6~~$23.4 million in the ~~first~~second quarter of 2018. Value-added sales into the medical and consumer electronics end markets decreased $2.1 million, while sales into the defense end market increased $1.0 million. The reduction in value-added sales into the medical end market was primarily driven by the blood glucose test strip business. Increased value-added sales into the ~~defense~~industrial end market of $0.6 million were ~~due to optical filters~~more than offset by decreased value-added sales into the consumer electronics and ~~other products utilized in defense missile applications.~~semiconductor end markets.

The Precision Coatings segment generated operating profit of ~~$2.1~~$3.9 million in the ~~first~~second quarter of 2019, compared to an operating profit of ~~$3.4~~$2.2 million in the ~~first~~second quarter of 2018. The ~~decrease~~increase in operating profit was driven by ~~lower~~favorable mix and improved manufacturing performance, compared to the second quarter last year.

Six Months



(Thousands)	Six Months Ended
	June 28,		June 29,		$		%
	2019		2018		Change		Change
Net sales	$	59,677	$	60,682	(1,005	)	(2	)%
Value-added sales	45,626		47,034		(1,408	)	(3	)%
Operating profit	6,014		5,608		406		7	%

Net sales from the Precision Coatings segment of $59.7 million in the first six months of 2019 decreased 2% compared to net sales of $60.7 million in the first six months of 2018 due to decreased sales volume, ~~and increased~~partially offset by a $2.4 million favorable impact of pass-through precious metal ~~lease costs,~~prices.

Value-added sales of $45.6 million in the first six months of 2019 decreased 3% compared to value-added sales of $47.0 million in the first six months of 2018. Value-added sales into the consumer electronics, semiconductor, and other end markets decreased $3.4 million, while sales into the industrial end market increased $2.1 million.

The Precision Coatings segment generated operating profit of $6.0 million in the first six months of 2019, compared to an operating profit of $5.6 million in the first six months of 2018. The increase in operating profit was driven by favorable mix and improved manufacturing performance, compared to the first ~~quarter~~half of last year.

Other

~~First~~Second Quarter


(Thousands)	First Quarter Ended										Second Quarter Ended
	March 29,			March 30,			$		%		June 28,			June 29,			$		%
	2019			2018			Change		Change		2019			2018			Change		Change
Net sales	$	—		$	—		—		—	%	$	—		$	—		—		—	%
Value-added sales	(1,964		)	(910		)	(1,054	)	116	%	(1,743		)	(908		)	(835	)	92	%
Operating loss	(6,728		)	(5,883		)	(845	)	14	%	(6,654		)	(4,922		)	(1,732	)	35	%

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs of ~~$6.7~~$6.6 million in the ~~first~~second quarter of 2019 increased ~~$0.8~~$1.7 million as compared to ~~$5.9~~$4.9 million in the ~~first~~second quarter of 2018. ~~As a percentage of Company-wide value-added sales, corporate~~Corporate costs accounted for ~~4% and~~ 3% of Company value-added sales in the ~~first~~second quarter of both 2019 and ~~2018, respectively.~~2018. The increase in corporate costs in the ~~first~~second quarter of 2019, compared to the ~~first~~second quarter of 2018, is reflective of investments to execute ~~our~~ strategic initiatives and variable costs associated with improved financial performance.

Six Months



(Thousands)	Six Months Ended
	June 28,			June 29,			$		%
	2019			2018			Change		Change
Net sales	$	—		$	—		—		—	%
Value-added sales	(3,707		)	(1,818		)	(1,889	)	104	%
Operating loss	(13,382		)	(10,805		)	(2,577	)	24	%

Corporate costs of $13.4 million in the first half of 2019 increased $2.6 million as compared to $10.8 million in the first half of 2018. Corporate costs accounted for 3% of Company value-added sales in the first half of both 2019 and 2018. The increase in corporate costs in the first half of 2019, compared to the first half of 2018, is reflective of investments to execute strategic initiatives and variable costs associated with improved financial performance.

FINANCIAL POSITION

Cash Flow

A summary of cash flows ~~used in~~provided by (used in) operating, investing, and financing activities is as follows:


	Three Months Ended									Six Months Ended
	March 29,			March 30,			$			June 28,			June 29,			$
(Thousands)	2019			2018			Change			2019			2018			Change
Net cash used in operating activities	$	(12,617	)	$	(8,175	)	$	(4,442	)
Net cash provided by operating activities										$	30,046		$	29,304		$	742
Net cash used in investing activities	(9,321		)	(9,525		)	204			(15,409		)	(20,551		)	5,142
Net cash used in financing activities	(6,797		)	(4,546		)	(2,251		)	(10,326		)	(7,710		)	(2,616		)
Effects of exchange rate changes	(46		)	608			(654		)	(100		)	8			(108		)
Net change in cash and cash equivalents	$	(28,781	)	$	(21,638	)	$	(7,143	)	$	4,211		$	1,051		$	3,160

Net cash ~~used in~~provided by operating activities totaled ~~$12.6~~$30.0 million in the first ~~three~~six months of 2019 versus ~~$8.2~~$29.3 million in the comparable prior-year period. Working capital requirements used cash of ~~$40.3~~$29.3 million during the first ~~quarter~~six months of 2019 compared to a use of ~~$19.8~~$15.8 million in the first ~~quarter~~six months of 2018. Cash flows used for accounts receivable were ~~$6.1~~$0.3 million ~~higher~~lower than the prior-year period. ~~Our three-month~~Three-month trailing days sales outstanding was approximately 43 days at June 28, 2019 and 41 days at ~~both March 29, 2019 and~~ December

31, 2018. Inventory ~~levels increased~~reduction initiatives generated a cash flow benefit of $1.3 million in the first six months of 2019 compared to a benefit of $10.4 million in first six months of 2018, related primarily into our ~~Advanced Materials segment related to the timing of raw material purchases.~~Performance Alloys and Composites business. Cash flows used for accounts payable and accrued expenses were ~~$16.0~~$18.8 million ~~comparable~~compared to the prior-year period use of cash of ~~$16.3 million.~~$14.2 million due to higher incentive compensation payments tied to improved financial performance.

Net cash used in investing activities was ~~$9.3~~$15.4 million in the first ~~quarter~~half of 2019 compared to ~~$9.5~~$20.6 million in the prior-year period due to lower levels of capital spending.

Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2019, the Company expects payments for ~~property,~~p

roperty, plant, and equipment to be approximately $30.0 million and mine development expenditures to be less than $5.0 million.

Net cash used in financing activities totaled ~~$6.8~~$10.3 million in the first ~~quarter~~half of 2019 versus ~~$4.5~~$7.7 million used in financing activities in the comparable prior-year period. The increase in cash used is primarily due to higher payments of withholding taxes for stock-based compensation awards.

Liquidity

We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share repurchase program, environmental remediation projects, and strategic acquisitions. At ~~March 29,~~June 28, 2019, cash and cash equivalents held by our foreign operations totaled ~~$10.3~~$17.8 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of ~~March 29,~~June 28, 2019 and December 31, 2018 is as follows:


	March 29,		December 31,		June 28,		December 31,
(Thousands)	2019		2018		2019		2018
Cash	$	41,864	$	70,645
Cash and cash equivalents					$	74,856	$	70,645
Total outstanding debt	2,842		3,041		2,637		3,041
Net cash	$	39,022	$	67,604	$	72,219	$	67,604
Available borrowing capacity	$	294,914	$	275,488	$	316,828	$	275,488

Net cash is a non-GAAP financial measure. 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.

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 Company's revolving credit agreement (Credit Agreement) expires in 2020 and is secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets. The Credit Agreement allows us to borrow money at a premium over LIBOR or prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the agreement. The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of ~~March 29,~~June 28, 2019 and December 31, 2018. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.

Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. The available and unused capacity under the metal financing lines expiring in September 2019 totaled approximately ~~$173.7~~$154.3 million as of ~~March 29,~~

June 28, 2019 and $133.9 million as of December 31, 2018. The availability is determined by Board approved levels and actual line capacity.

In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given

year, and the repurchases may be discontinued at any time. In the first ~~quarter~~six months of 2019, we repurchased 4,500 shares of our common stock for $0.2 million. We did not repurchase any of our common shares during the second quarter of 2019. Since the approval of the repurchase plan, we have purchased 1,096,264 shares at a total cost of $34.9 million.

~~In the first quarter of 2019, we~~We paid cash dividends of ~~$2.1~~$2.3 million and $4.4 million on our common ~~stock.~~stock in the second quarter and first six months of 2019, respectively. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We maintain the majority of the precious metals and copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$276.3~~$295.7 million as of ~~March 29,~~June 28, 2019, versus $316.1 million as of December 31, 2018. We were in compliance with all of the covenants contained in the consignment agreements as of ~~March 29,~~June 28, 2019 and December 31, 2018. For additional information on our contractual obligations, refer to our 2018 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. For additional information regarding critical accounting policies, please refer to our 2018 Annual Report on Form 10-K.

Impairment of Goodwill and Long-Lived Assets

Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of first day of the fourth quarter, which was September 29, 2018.

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

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

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

Forward-looking Statements

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


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


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


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


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


▪	Changes in product mix and the financial condition of customers;


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


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


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


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


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

▪

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

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; and

The risk factors set forth in Part 1, Item 1A of our 2018 Annual Report on Form 10-K.



Item 3.	Quantitative and Qualitative Disclosures about Market Risk

For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2018 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2018 Annual Report on Form 10-K.



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 ~~March 29,~~June 28, 2019 pursuant to Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as 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 ~~March 29,~~June 28, 2019.

b)Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended ~~March 29,~~June 28, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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

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PART II OTHER INFORMATION



Item 1.	Legal Proceedings

Our subsidiaries and our holding company are subject, from time to time, to a variety of civil and administrative proceedings arising out of our normal operations, including, without limitation, product liability claims, health, safety, and environmental claims, and employment-related actions. Among such proceedings are cases alleging that plaintiffs have contracted, or have been placed at risk of contracting, beryllium sensitization or chronic beryllium disease or other lung conditions as a result of exposure to beryllium (beryllium cases). The plaintiffs in beryllium cases seek recovery under negligence and various other legal theories and demand compensatory and often punitive damages, in many cases of an unspecified sum. Spouses of some plaintiffs claim loss of consortium.

The information presented in the Legal Proceedings section of Note N ("Contingencies") of the Notes to Consolidated Financial Statements (Unaudited) is incorporated herein by reference.



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

The following table presents information with respect to repurchases of common stock made by us during the three months ended ~~March 29,~~June 28, 2019.

Period
Total Number of Shares Purchased (1)
Average Price Paid per Share (1)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 1 through February 1, 2019

4,500

$ 44.29

4,500

$ 15,081,991
February 2 through March 1, 2019

10,372

58.20

—

15,081,991
March 2 through March 29, 2019

64,860

52.02

—

15,081,991
Total
79,732

$ 52.39

4,500

$ 15,081,991



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
March 30 through May 3, 2019	2,542	$	44.97	—	$	15,081,991
May 4 through May 31, 2019	9,686	67.54		—	15,081,991
June 1 through June 28, 2019	256	63.81		—	15,081,991
Total	12,484	$	62.87	—	$	15,081,991



(1)	Includes ~~10,372~~2,542, 9,686, and ~~64,860~~256 shares surrendered to the Company in ~~February~~April, May, and ~~March,~~June, respectively, by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.

(2)	On January 14, 2014, we announced that our Board of Directors had authorized the repurchase of up to $50.0 million of our common stock. We ~~repurchased 4,500~~did not repurchase any shares under this program during the ~~first~~second quarter of 2019. As of ~~March 29,~~June 28, 2019, $15.1 million may still be purchased under the program.



Item 4.	Mine Safety Disclosures

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this quarterly report on Form 10-Q.

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Item 6.	Exhibits



31.1		Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)*
31.2		Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)*
32		Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section ~~1350~~1350
95		Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended ~~March 29,~~June 28, 2019*
101.INS		XBRL Instance DocumentDocument - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		XBRL Taxonomy Extension Schema Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

*Submitted electronically herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




				MATERION CORPORATION

Dated: ~~May 2,~~July 25, 2019
				/s/ Joseph P. Kelley
				Joseph P. Kelley
				Vice President, Finance and Chief Financial Officer
				(Principal Financial and Accounting Officer)

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