

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

6070 Parkland ~~Blvd~~.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. Yes þ 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). Yes þ No ¨

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

Large accelerated filer þ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

Number of Shares of Common Stock, without par value, outstanding at June ~~28, 2019: 20,399,425.~~26, 2020: 20,322,225.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Second Quarter Ended						Six Months Ended
(Thousands, except per share amounts)	June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019
Net sales	$	271,468	$	297,843	$	549,414	$	599,284
Cost of sales	223,378		228,249		455,749		460,378
Gross margin	48,090		69,594		93,665		138,906
Selling, general, and administrative expense	32,852		39,891		63,596		79,955
Research and development expense	4,502		4,062		8,687		7,802
Goodwill impairment charges	—		—		9,053		—
Held for sale impairment charges	—		—		1,713		—
Restructuring expense	2,387		—		4,551		—
Other—net	(357)		2,891		1,922		7,012
Operating profit	8,706		22,750		4,143		44,137
Other non-operating (income) expense—net	(851)		3,112		(1,795)		3,357
Interest expense—net	1,259		500		1,505		966
Income before income taxes	8,298		19,138		4,433		39,814
Income tax expense	1,620		3,598		858		7,368
Net income	$	6,678	$	15,540	$	3,575	$	32,446
Basic earnings per share:
Net income per share of common stock	$	0.33	$	0.76	$	0.18	$	1.60
Diluted earnings per share:
Net income per share of common stock	$	0.32	$	0.75	$	0.17	$	1.57
Weighted-average number of shares of common stock outstanding:
Basic	20,317		20,383		20,350		20,326
Diluted	20,554		20,666		20,587		20,635

Second Quarter Ended Six Months Ended
(Thousands, except per share amounts) June 28, 2019 June 29, 2018 June 28, 2019 June 29, 2018
Net sales $ 297,843
$ 309,085
$ 599,284
$ 612,552
Cost of sales 228,249
247,247
460,378
492,434
Gross margin 69,594
61,838
138,906
120,118
Selling, general, and administrative expense 39,891
38,473
79,955
76,935
Research and development expense 4,062
3,860
7,802
7,503
Other—net 2,891
4,313
7,012
7,237
Operating profit 22,750
15,192
44,137
28,443
Interest expense—net 500
667
966
1,397
Other non-operating expense—net 3,112
437
3,357
879
Income before income taxes 19,138
14,088
39,814
26,167
Income tax expense 3,598
2,944
7,368
4,459
Net income $ 15,540
$ 11,144
$ 32,446
$ 21,708
Basic earnings per share:
Net income per share of common stock $ 0.76
$ 0.55
$ 1.60
$ 1.08
Diluted earnings per share:
Net income per share of common stock $ 0.75
$ 0.54
$ 1.57
$ 1.05
Weighted-average number of shares of common stock outstanding:
Basic 20,383
20,221
20,326
20,178
Diluted 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)


	Second Quarter Ended						Six Months Ended
	June 26,		June 28,		June 26,		June 28,
(Thousands)	2020		2019		2020		2019
Net income	$	6,678	$	15,540	$	3,575	$	32,446
Other comprehensive (loss) income:
Foreign currency translation adjustment	1,166		339		293		(164)
Derivative and hedging activity, net of tax	347		(1,000)		(507)		(73)
Pension and post-employment benefit adjustment, net of tax	89		13,953		105		14,493
Other comprehensive income (loss)	1,602		13,292		(109)		14,256
Comprehensive income	$	8,280	$	28,832	$	3,466	$	46,702

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

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets


	(Unaudited)
	June 26,		Dec. 31,
(Thousands)	2020		2019
Assets
Current assets
Cash and cash equivalents	$	265,068	$	125,007
Accounts receivable, net	146,527		154,751
Inventories, net	209,847		190,390
Prepaid and other current assets	29,191		21,839
Assets held for sale	5,811		—
Total current assets	656,444		491,987
Deferred income taxes	1,669		1,666
Property, plant, and equipment	924,620		916,965
Less allowances for depreciation, depletion, and amortization	(685,355)		(684,689)
Property, plant, and equipment—net	239,265		232,276
Operating lease, right-of-use assets	48,942		23,413
Intangible assets	5,732		6,380
Other assets	19,169		17,937
Goodwill	70,001		79,011
Total Assets	$	1,041,222	$	852,670
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt	$	151,731	$	868
Accounts payable	52,093		43,206
Salaries and wages	24,367		41,167
Other liabilities and accrued items	33,429		32,477
Income taxes	1,779		1,342
Unearned revenue	3,003		3,380
Liabilities held for sale	2,126		—
Total current liabilities	268,528		122,440
Other long-term liabilities	10,117		11,560
Operating lease liabilities	44,830		18,091
Finance lease liabilities	16,939		17,424
Retirement and post-employment benefits	32,389		32,466
Unearned income	57,799		32,891
Long-term income taxes	3,508		3,451
Deferred income taxes	2,172		2,410
Long-term debt	—		1,260
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 26 and December 31)	256,756		249,674
Retained earnings	588,803		589,888
Common stock in treasury	(198,726)		(186,845)
Accumulated other comprehensive loss	(45,571)		(45,462)
Other equity	3,678		3,422
Total shareholders' equity	604,940		610,677
Total Liabilities and Shareholders’ Equity	$	1,041,222	$	852,670

(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

See the notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
	June 26,		June 28,
(Thousands)	2020		2019
Cash flows from operating activities:
Net income	$	3,575	$	32,446
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization	23,522		22,607
Amortization of deferred financing costs in interest expense	364		472
Stock-based compensation expense (non-cash)	3,966		3,541

Deferred income tax (benefit) expense	(234)		4,578
Net pension curtailments and settlements	94		3,296
Held for sale impairment charges	10,766		—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable	5,331		(11,778)
Decrease (increase) in inventory	(20,585)		1,306
Decrease (increase) in prepaid and other current assets	(7,264)		(588)
Increase (decrease) in accounts payable and accrued expenses	(7,634)		(18,813)
Increase (decrease) in unearned revenue	(257)		(88)
Increase (decrease) in interest and taxes payable	1,058		(1,130)
Increase (decrease) in unearned income due to customer prepayments	26,713		—
Domestic pension plan contributions	—		(3,000)
Other-net	(2,982)		(2,803)
Net cash provided by operating activities	36,433		30,046
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment	(32,034)		(13,833)
Payments for mine development	—		(1,591)

Proceeds from sale of property, plant, and equipment	33		15
Net cash used in investing activities	(32,001)		(15,409)
Cash flows from financing activities:


Short-term debt under revolving credit agreement	150,000		—
Repayment of long-term debt	(428)		(397)
Principal payments under finance lease obligations	(626)		(599)
Cash dividends paid	(4,582)		(4,368)
Repurchase of common stock	(6,766)		(199)
Payments of withholding taxes for stock-based compensation awards	(2,025)		(4,763)
Net cash provided by (used in) financing activities	135,573		(10,326)
Effects of exchange rate changes	56		(100)
Net change in cash and cash equivalents	140,061		4,211
Cash and cash equivalents at beginning of period	125,007		70,645
Cash and cash equivalents at end of period	$	265,068	$	74,856

~~(Unaudited)~~

Six Months Ended
June 28, June 29,
(Thousands) 2019 2018
Cash flows from operating activities:
Net income $ 32,446
$ 21,708
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization 22,607
18,349
Amortization of deferred financing costs in interest expense 472
514
Stock-based compensation expense (non-cash) 3,541
2,164
Deferred income tax expense 4,578
429
Pension curtailment charge 3,296
—
Changes in assets and liabilities:
Decrease (increase) in accounts receivable

(11,778 ) (12,060 )
Decrease (increase) in inventory 1,306
10,428
Decrease (increase) in prepaid and other current assets (588 ) 4,928
Increase (decrease) in accounts payable and accrued expenses (18,813 ) (14,189 )
Increase (decrease) in unearned revenue (88 ) 2,132
Increase (decrease) in interest and taxes payable

(1,130 ) 2,084
Domestic pension plan contributions (3,000 ) (13,000 )
Other-net (2,803 ) 5,817
Net cash provided by operating activities 30,046
29,304
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment (13,833 ) (17,153 )
Payments for mine development (1,591 ) (3,425 )
Proceeds from sale of property, plant, and equipment 15
27
Net cash used in investing activities (15,409 ) (20,551 )
Cash flows from financing activities:
Repayment of long-term debt (397 ) (383 )
Principal payments under finance lease obligations (599 ) (425 )
Cash dividends paid (4,368 ) (4,137 )
Repurchase of common stock (199 ) —
Payments of withholding taxes for stock-based compensation awards (4,763 ) (2,765 )
Net cash used in financing activities (10,326 ) (7,710 )
Effects of exchange rate changes (100 ) 8
Net change in cash and cash equivalents 4,211
1,051
Cash and cash equivalents at beginning of period 70,645
41,844
Cash and cash equivalents at end of period $ 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
(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 March 29, 2019 20,354
(6,794 ) $ 241,480
$ 562,941
$ (184,812 ) $ (57,270 ) $ 4,538
$ 566,877
Net income —
—
—
15,540
—
—
—
15,540
Other comprehensive income (loss) —
—
—
—
—
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 —
—
—
—
—
—
—
—
Cash dividends declared ($0.105 per share) —
—
—
(2,125 ) —
—
—
(2,125 )
Stock-based compensation activity 55
55
3,020
(14 ) (1,613 ) —
—
1,393
Payments of withholding taxes for stock-based compensation awards (11 ) (11 ) —
—
(632 ) —
—
(632 )
Directors’ deferred compensation 1
2
49
—
(6 ) —
49
92
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 March 27, 2020	20,310	(6,838)	$	253,967	$	584,505	$	(198,311)	$	(47,173)	$	3,490	$	596,478
Net income	—	—	—		6,678		—		—		—		6,678
Other comprehensive income (loss)	—	—	—		—		—		1,602		—		1,602
Cash dividends declared ($0.115 per share)	—	—	—		(2,337)		—		—		—		(2,337)
Stock-based compensation activity	11	11	2,775		(43)		(259)		—		—		2,473
Payments of withholding taxes for stock-based compensation awards	—	—	—		—		(10)		—		—		(10)
Directors’ deferred compensation	1	1	14		—		(146)		—		188		56
Balance at June 26, 2020	20,322	(6,826)	$	256,756	$	588,803	$	(198,726)	$	(45,571)	$	3,678	$	604,940

Balance at March 29, 2019	20,354	(6,794)	$	241,480	$	562,941	$	(184,812)	$	(57,270)	$	4,538	$	566,877
Net income	—	—	—		15,540		—		—		—		15,540
Other comprehensive income	—	—	—		—		—		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)
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


	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, 2019	20,404	(6,744)	$	249,674	$	589,888	$	(186,845)	$	(45,462)	$	3,422	$	610,677
Net income	—	—	—		3,575		—		—		—		3,575
Other comprehensive income (loss)	—	—	—		—		—		(109)		—		(109)
Cash dividends declared ($0.225 per share)	—	—	—		(4,582)		—		—		—		(4,582)
Stock-based compensation activity	110	110	7,037		(78)		(2,902)		—		—		4,057
Payments of withholding taxes for stock-based compensation awards	(36)	(36)	—		—		(2,025)		—		—		(2,025)
Repurchase of shares	(158)	(158)	—		—		(6,766)		—		—		(6,766)
Directors’ deferred compensation	2	2	45		—		(188)		—		256		113
Balance at June 26, 2020	20,322	(6,826)	$	256,756	$	588,803	$	(198,726)	$	(45,571)	$	3,678	$	604,940

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	—	—	—		—		—		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

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~~2020 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~~2019 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~~June 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~~is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company adopted this guidance as of January 1, 2020, and the adoption did not have a material effect on the Company’s consolidated financial statements. Accounts receivable were net of an allowance for credit losses of $0.7 million and $0.4 million at June 26, 2020 and December 31, 2019, respectively. The change in the allowance for credit losses includes expense and net write-offs, none of which is ~~currently assessing the effect that this ASU will have on its financial position, results of operations, and disclosures.~~significant.

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,~~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

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.


(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
Second Quarter 2020
Net sales	$	101,614	$	150,108	$	19,746	$	—	$	271,468
Intersegment sales	(213)		8,997		—		—		8,784
Operating profit (loss)	8,244		4,370		2,091		(5,999)		8,706
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

First Six Months 2020
Net sales	$	200,681	$	310,273	$	38,460	$	—	$	549,414
Intersegment sales	2		18,188		—		—		18,190
Operating profit (loss)	13,035		9,155		(7,501)		(10,546)		4,143
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

The following table disaggregates revenue for each segment by end market for the second quarter and first six months of ~~2019~~2020 and ~~2018,~~2019, respectively:


(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
Second Quarter 2020
End Market
Semiconductor	$	1,537	$	123,908	$	232	$	—	$	125,677
Industrial	23,831		8,419		2,574		—		34,824
Aerospace and Defense	17,952		1,650		4,119		—		23,721
Consumer Electronics	9,956		21		3,404		—		13,381
Automotive	16,415		1,186		7		—		17,608
Energy	5,590		9,327		—		—		14,917
Telecom and Data Center	12,586		788		—		—		13,374
Other	13,747		4,809		9,410		—		27,966
Total	$	101,614	$	150,108	$	19,746	$	—	$	271,468

Second Quarter 2019
End Market
Semiconductor	$	1,303	$	101,634	$	93	$	—	$	103,030
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		3,866		15,894		—		30,283
Total	$	135,231	$	133,238	$	29,374	$	—	$	297,843

(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 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


(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
First Six Months 2020
End Market
Semiconductor	$	2,443	$	244,727	$	243	$	—	$	247,413
Industrial	47,171		16,781		5,671		—		69,623
Aerospace and Defense	32,158		3,077		9,228		—		44,463
Consumer Electronics	24,651		138		6,946		—		31,735
Automotive	34,579		3,266		24		—		37,869
Energy	11,019		32,795		—		—		43,814
Telecom and Data Center	22,575		1,658		—		—		24,233
Other	26,085		7,831		16,348		—		50,264
Total	$	200,681	$	310,273	$	38,460	$	—	$	549,414

First Six Months 2019
End Market
Semiconductor	$	3,268	$	206,725	$	205	$	—	$	210,198
Industrial	55,015		15,632		7,992		—		78,639
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		38,224		—		—		60,621
Telecom and Data Center	35,836		914		—		—		36,750
Other	19,213		9,422		33,355		—		61,990
Total	$	262,344	$	277,263	$	59,677	$	—	$	599,284

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 June ~~28, 2019.~~26, 2020. Remaining performance obligations include ~~noncancelable~~non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the practical expedient at June ~~28, 2019,~~26, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$19.6~~$29.2 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)	June 26, 2020		December 31, 2019		$ change		% change
Accounts receivable, trade	$	141,465	$	141,168	$	297	—	%
Unbilled receivables	5,218		13,583		(8,365)		(62)	%
Unearned revenue	3,003		3,380		(377)		(11)	%

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 six months of ~~2019.~~2020.

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 approximately ~~$5.0~~$3.1 million of the unearned amounts as revenue during the first six months of ~~2019.~~2020.

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 six months of of2020 and 2019 ~~and 2018~~ is summarized as follows:


	Second Quarter Ended						Six Months Ended
	June 26,		June 28,		June 26,		June 28,
(Thousands)	2020		2019		2020		2019
Metal consignment fees	$	2,037	$	2,225	$	4,266	$	5,316
Amortization of intangible assets	106		368		294		758
Foreign currency (gain) loss	(2,486)		307		(2,548)		384
Net loss on disposal of fixed assets	9		118		55		142
Other items	(23)		(127)		(145)		412
Total	$	(357)	$	2,891	$	1,922	$	7,012

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

Note E — Restructuring

In the first half of 2020, the Company initiated a restructuring plan in its Performance Alloys and Composites (PAC) segment to close its Warren, Michigan and Fremont, California locations. Costs associated with the plan totaled $2.4 million and $4.6 million in the second quarter and first six months of 2020, respectively. In the second quarter of 2020, these costs included $0.9 million of severance associated with approximately 60 employees and $1.5 million of facility and other related costs. Included in restructuring charges for the first six months of 2020 was $1.4 million of severance associated with approximately 60 employees and $3.1 million of facility and other related costs.

Remaining severance payments of $1.2 million and facility costs of $0.4 million related to these initiatives are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company expects to incur additional costs related to these initiatives of approximately $4 million in the remainder of 2020.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note F — Income Taxes

The Company's effective tax rate for the second quarter of 2020 and 2019 was 19.5% and ~~2018 was~~ 18.8% ~~and 20.9%~~, respectively, and ~~18.5%~~19.4% and ~~17.0%~~18.5% for the first six months of ~~2019~~2020 and ~~2018,~~2019, 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 the first six months of 2020 included a net discrete income tax expense of $0.8 million, primarily related to an impairment of goodwill. The effective tax rate for the first six months of 2019 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based ~~compensation.~~compensation awards.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The ~~effective~~CARES Act, among other things, includes provisions relating to refundable payroll tax ~~rate for~~credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the ~~first six months of 2018 included~~net interest deduction limitations. While the Company continues to examine the impacts the CARES Act may have on its business, it does not expect it will have a ~~net discrete income~~material impact to its consolidated financial statements.

On July 9, 2020, the U.S. Treasury Department issued final tax ~~benefit of $1.0 million, primarily~~regulations related to ~~Staff Accounting Bulletin (SAB) No. 118 adjustments.~~the foreign-derived intangible income and global intangible low-taxed income (GILTI) provisions. Also, on July 20, 2020 the U.S. Treasury Department released final tax regulations permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax. The Company is currently assessing the impact of the new legislation to its consolidated financial statements.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note FG — 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


	Second Quarter Ended						Six Months Ended
	June 26,		June 28,		June 26,		June 28,
(Thousands, except per share amounts)	2020		2019		2020		2019
Numerator for basic and diluted EPS:
Net income	$	6,678	$	15,540	$	3,575	$	32,446
Denominator:
Denominator for basic EPS:
Weighted-average shares outstanding	20,317		20,383		20,350		20,326
Effect of dilutive securities:
Stock appreciation rights	36		76		36		92
Restricted stock units	63		76		80		77
Performance-based restricted stock units	138		131		121		140
Diluted potential common shares	237		283		237		309
Denominator for diluted EPS:
Adjusted weighted-average shares outstanding	20,554		20,666		20,587		20,635
Basic EPS	$	0.33	$	0.76	$	0.18	$	1.60
Diluted EPS	$	0.32	$	0.75	$	0.17	$	1.57

~~Securities~~Adjusted weighted-average shares outstanding-diluted excludes securities totaling ~~84,509~~191,500 and ~~65,112~~84,509 for the quarters ended June 26, 2020 and June 28, 2019, ~~and June 29, 2018,~~ respectively, and ~~144,154~~230,893 and ~~65,112~~144,154 for the six months ended June 26, 2020 and June 28, 2019, respectively. These securities primarily related to restricted stock units and ~~June 29, 2018, respectively,~~stock appreciation rights with fair market values and exercise prices less than the average market price of the Company's common shares and were excluded from the dilution calculation as ~~their~~the effect would have been anti-dilutive.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note GH — 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


	June 26,		December 31,
(Thousands)	2020		2019
Raw materials and supplies	$	54,720	$	35,612
Work in process	172,678		177,780
Finished goods	30,304		25,506
Subtotal	$	257,702	$	238,898
Less: LIFO reserve balance	47,855		48,508
Inventories	$	209,847	$	190,390

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~~2020 and ~~2018.~~2019.

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 ~~$295.7~~$333.9 million as of June ~~28, 2019~~26, 2020 versus ~~$316.1~~$309.3 million as of December 31, ~~2018.~~2019.

Note I — Held for Sale

In the first six months of 2020, the Company committed to a plan to sell its Large Area Coatings (LAC) reporting unit within the Precision Coatings segment and determined that it met the criteria to be classified as held for sale. Therefore, its assets and liabilities have been presented as held for sale in the Consolidated Balance Sheet as of June 26, 2020. Assets and liabilities classified as held for sale are measured at the lower of carrying value or fair value less costs to sell.

Before measuring the fair value less costs to sell of the disposal group as a whole, the Company first reviewed individual assets and liabilities to determine if any fair value adjustments were required. The Company recorded a goodwill impairment charge of $9.1 million in the first half of 2020 to write-off the remaining balance of goodwill for the LAC reporting unit. The Company determined fair value based on its expected proceeds to be received, which it concluded is most representative of the value of the assets.

The Company then estimated the fair value of the disposal group as a whole, less costs to sell, and compared the fair value to the remaining carrying value. Based on this review, the Company recorded a $1.7 million asset impairment loss in the first six months of 2020. NaN additional impairment charges were recorded in the second quarter of 2020.

The assets and liabilities of the LAC reporting unit classified as held for sale at June 26, 2020 were as follows:


(Thousands)
Accounts receivable, net	$	2,987
Inventories, net	1,305
Prepaid and other current assets	8
Property, plant, and equipment - net	2,508
Operating lease, right-of-use assets	716
Impairment on carrying value	(1,713)
Assets held for sale	$	5,811

Accounts payable	$	870
Salaries and wages	245
Other liabilities and accrued items	228
Operating lease liabilities	728
Other long term liabilities	55
Liabilities held for sale	$	2,126

1114

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Excluding the $9.1 million goodwill impairment charge and $1.7 million asset impairment charge recorded in the first half of 2020, the operating results of the LAC reporting unit were not material to the Company for any period presented.

Note HJ — Goodwill

A summary of changes in goodwill by reportable segment is as follows:


(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Total
Balance at December 31, 2019	$	1,899	$	50,190	$	26,922	$	79,011
Impairment charge	—		—		(9,053)		(9,053)
Other	—		43		—		43
Balance at June 26, 2020	$	1,899	$	50,233	$	17,869	$	70,001

Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment.

Note K — Customer Prepayments

The Company entered into an investment agreement with a customer to procure equipment to manufacture product for the customer. The customer will make prepayments to the Company in the amount of approximately $70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer. The Company will own the equipment and be responsible for operating and maintenance costs. The prepayment from the customer will be applied when commercial production of the product is sold and delivered to the customer in connection with a master supply agreement. Accordingly, $31.4 million of prepayments are classified as Unearned Income in the Consolidated Balance Sheet, of which $19.6 million were received during the second quarter of 2020, and the liability is expected to be settled as commercial shipments are made.

Note L — 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 June ~~28, 2019~~26, 2020 was ~~5.09~~13.57 years and ~~19.87~~19.37 years, respectively.

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 June ~~28, 2019~~26, 2020 was ~~5.55%~~6.41% and 5.31%, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The components of operating and finance lease cost for the second quarter and first six months of 2020 and 2019 were as follows:


	Second Quarter Ended						Six Months Ended
(Thousands)	June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019
Components of lease expense
Operating lease cost	$	2,274	$	2,291	$	4,532	$	5,003

Finance lease cost
Amortization of right-of-use assets	350		354		701		710
Interest on lease liabilities	238		259		482		522
Total lease cost	$	2,862	$	2,904	$	5,715	$	6,235

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

Operating lease expense amounted to $2.3 million and ~~$3.0~~$4.5 million during the second quarter ~~of 2019~~ and ~~2018, respectively, and $5.0 million and $6.1 million during the~~ first six months of ~~2019~~2020, respectively, compared to $2.3 million and ~~2018, respectively.~~$5.0 million, respectively, during the same periods of 2019. 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.

1216

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 June ~~28,~~26, 2020 and December 31, 2019 was as follows:


	June 26,		Dec. 31,
(Thousands)	2020		2019
Supplemental balance sheet information

Operating Leases
Operating lease right-of-use assets	$	48,942	$	23,413
Other liabilities and accrued items	5,298		6,542
Operating lease liabilities	44,830		18,091

Finance Leases
Property, plant, and equipment	$	26,258	$	26,069
Allowances for depreciation, depletion, and amortization	(4,035)		(3,570)
Finance lease assets, net	$	22,223	$	22,499
Other liabilities and accrued items	$	1,305	$	1,265
Finance lease liabilities	16,939		17,424
Total principal payable on finance leases	$	18,244	$	18,689

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

Future maturities of the Company's lease liabilities as of June ~~28, 2019~~26, 2020 are as follows:


	Finance		Operating
(Thousands)	Leases		Leases
2020	$	1,119	$	3,986
2021	2,238		7,841
2022	2,238		6,846
2023	1,528		6,548
2024	1,174		4,704
2025 and thereafter	21,126		46,967
Total lease payments	29,423		76,892
Less amount of lease payment representing interest	11,179		26,764
Total present value of lease payments	$	18,244	$	50,128

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

Supplemental cash flow information related to leases for the first six months of 2020 and 2019 ~~was~~were as follows:


	Six Months Ended
(Thousands)	June 26, 2020		June 28, 2019
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	7,275	$	7,710
Operating cash flows from finance leases	482		522
Financing cash flows from finance leases	626		599

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)

Note IM — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the second quarter and first six months of ~~2019~~2020 and ~~2018~~2019 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 26,		June 28,		June 26,		June 28,
(Thousands)	2020		2019		2020		2019
Components of net periodic benefit cost (credit)
Service cost	$	—	$	1,418	$	15	$	18
Interest cost	1,215		1,347		53		99
Expected return on plan assets	(2,205)		(2,167)		—		—
Amortization of prior service cost (benefit)	—		122		(374)		(375)
Amortization of net loss (gain)	284		627		(83)		(23)
Net periodic benefit (credit) cost	$	(706)	$	1,347	$	(389)	$	(281)
Net pension settlements/curtailments	94		3,296		—		—
Total net benefit cost	$	(612)	$	4,643	$	(389)	$	(281)

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
	Six Months Ended						Six Months Ended							Six Months Ended						Six Months Ended
	June 28,			June 29,			June 28,			June 29,				June 26,		June 28,		June 26,		June 28,
(Thousands)	2019			2018			2019			2018			(Thousands)	2020		2019		2020		2019
Components of net periodic benefit cost (benefit)
Components of net periodic benefit cost (credit)													Components of net periodic benefit cost (credit)
Service cost	$	2,758		$	3,348		$	35		$	56		Service cost	$	—	$	2,758	$	31	$	35
Interest cost	2,904			4,794			199			198			Interest cost	2,429		2,904		107		199
Expected return on plan assets	(4,290		)	(7,394		)	—			—			Expected return on plan assets	(4,410)		(4,290)		—		—
Amortization of prior service benefit	242			(61		)	(749		)	(749		)
Amortization of prior service cost (benefit)													Amortization of prior service cost (benefit)	—		242		(749)		(749)
Amortization of net loss (gain)	1,431			3,919			(46		)	—			Amortization of net loss (gain)	568		1,431		(166)		(46)
Pension curtailment charge	3,296			—			—			—
Net periodic benefit cost (benefit)	$	6,341		$	4,606		$	(561	)	$	(495	)
Net periodic benefit (credit) cost													Net periodic benefit (credit) cost	$	(1,413)	$	3,045	$	(777)	$	(561)
Net pension settlements/curtailments													Net pension settlements/curtailments	94		3,296		—		—
Total net benefit cost													Total net benefit cost	$	(1,319)	$	6,341	$	(777)	$	(561)

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 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 )


	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, 2019	$	1,324	$	(452)	$	25	$	897	$	(41,346)	$	(5,013)	$	(45,462)
Other comprehensive (loss) income before reclassifications	(343)		(1,234)		(352)		(1,929)		—		293		(1,636)
Amounts reclassified from accumulated other comprehensive income	7		809		453		1,269		46		—		1,315
Net current period other comprehensive income (loss) before tax	(336)		(425)		101		(660)		46		293		(321)
Deferred taxes	(77)		(98)		22		(153)		(59)		—		(212)
Net current period other comprehensive income (loss) after tax	(259)		(327)		79		(507)		105		293		(109)
Balance at June 26, 2020	$	1,065	$	(779)	$	104	$	390	$	(41,241)	$	(4,720)	$	(45,571)

Balance at December 31, 2018	$	1,263	$	79	$	(441)	$	901	$	(54,543)	$	(4,592)	$	(58,234)
Other comprehensive (loss) 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)

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 MQ 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 IM for additional details on pension and post-employment expenses.

1620

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note KO — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was ~~$3.5~~$3.1 million and ~~$6.2~~$4.1 million in the second quarter and first six months of ~~2019,~~2020, respectively, compared to ~~$2.7~~$3.5 million and ~~$5.2~~$6.2 million, respectively, in the same periods of ~~2018.~~2019.

The Company granted ~~73,461~~64,636 stock appreciation rights (SARs) to certain employees during the first six months of ~~2019.~~2020. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the six months ended June ~~28, 2019~~26, 2020 were ~~$58.30~~$50.95 and ~~$17.76,~~$13.67, 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~~1.41	%
Dividend yield	~~0.7~~0.9	%
Volatility	~~31.7~~31.8	%
Expected term (in years)	~~5.2~~		4.8

The Company granted ~~63,665~~62,841 stock-settled restricted stock units (RSUs) to certain employees and ~~11,048 stock-settled RSUs~~15,976 to non-employee directors during the first six months of ~~2019.~~2020. 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~~$49.34 and ~~$68.79~~$48.42 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the six months ended June ~~28, 2019~~.26, 2020. RSUs are expensed over the vesting period of three 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 six months of ~~2019.~~2020. The weighted-average fair value of the stock-settled PRSUs was ~~$69.84~~$57.65 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 June ~~28, 2019~~,26, 2020, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately ~~$13.6~~$12.6 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note LP — Fair Value of Financial Instruments

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

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

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

Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect

those that a market participant would use.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of June ~~28, 2019~~26, 2020 and December 31, ~~2018:~~2019:

(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 $ 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)
			2020			2019			2020			2019			2020			2019			2020			2019
Financial Assets
Deferred compensation investments	$	2,625		$	3,391		$	2,625		$	3,391		$	—		$	—		$	—		$	—
Foreign currency forward contracts	2,220			188			—			—			2,220			188			—			—
Precious metal swaps	—			35			—			—			—			35			—			—
Copper swaps	137			61			—			—			137			61			—			—
Total	$	4,982		$	3,675		$	2,625		$	3,391		$	2,357		$	284		$	—		$	—
Financial Liabilities
Deferred compensation liability	$	2,625		$	3,391		$	2,625		$	3,391		$	—		$	—		$	—		$	—
Foreign currency forward contracts	523			211			—			—			523			211			—			—
Precious metal swaps	1,013			623			—			—			1,013			623			—			—
Copper swaps	3			28			—			—			3			28			—			—
Total	$	4,164		$	4,253		$	2,625		$	3,391		$	1,539		$	862		$	—		$	—

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 June ~~28, 2019~~26, 2020 and December 31, ~~2018.~~2019. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.

Note MQ — Derivative Instruments and Hedging Activity

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

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.

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

~~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.~~exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. ~~Hedge~~Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements.

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

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

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

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

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

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of June ~~28, 2019~~26, 2020 and December 31, ~~2018:~~2019:

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


	June 26, 2020						December 31, 2019
(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Foreign currency forward contracts
Prepaid expenses	$	152,803	$	2,198	$	13,734	$	95
Other liabilities and accrued items	9,786		63		5,757		16

These outstanding foreign currency derivatives were related to balance sheet hedges, intercompany ~~loans.~~loans, and a foreign currency hedge for the purchase of Optics Balzers AG (Optics Balzers), which the Company agreed to buy in June 2020. See Note T for additional information. Other-net included ~~no foreign currency impact relating to these derivatives during both the second quarter and the first six months of 2019 and included $1.6~~$1.7 million and ~~$1.1~~$2.3 million of foreign currency gains relating to these derivatives during the second quarter and first six months of ~~2018,~~2020, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of June ~~28, 2019~~26, 2020 and December 31, ~~2018:~~2019:

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


	June 26, 2020						December 31, 2019
(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Prepaid expenses
Foreign currency forward contracts - yen	$	—	$	—	$	1,025	$	10
Foreign currency forward contracts - euro	5,084		22		3,466		83
Precious metal swaps	—		—		1,116		34
Copper swaps	2,235		137		1,951		61
Total	7,319		159		7,558		188

Other assets
Precious metal swaps	—		—		157		1

Other liabilities and accrued items
Foreign currency forward contracts - yen	2,031		25		2,355		12
Foreign currency forward contracts - euro	11,974		420		15,686		183
Precious metal swaps	5,910		1,004		7,034		618
Copper swaps	293		3		1,266		28
Total	20,208		1,452		26,341		841

Other long-term liabilities
Foreign currency forward contracts - yen	112		1		—		—
Foreign currency forward contracts - euro	553		14		—		—
Precious metal swaps	172		9		149		5
Total	837		24		149		5

Total	$	28,364	$	1,317	$	34,205	$	657

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 June ~~28, 2019~~26, 2020 to the Consolidated Statements of Income within the next 15-month period. Refer to Note JN for additional OCI details.

~~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 the second quarter and first six months of of2020 and 2019:


		Second Quarter Ended		Second Quarter Ended
(Thousands)		June 26, 2020		June 28, 2019
Hedging relationship	Line item
Foreign currency forward contracts	Net sales	$	8	$	(46)
Precious metal swaps	Cost of sales	491		(1)
Copper swaps	Cost of sales	132		163
Total		$	631	$	116

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 )

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


		Six Months Ended		Six Months Ended
(Thousands)		June 26, 2020		June 28, 2019
Hedging relationship	Line item
Foreign currency forward contracts	Net sales	$	7	$	(44)
Precious metal swaps	Cost of sales	809		(62)
Copper swaps	Cost of sales	453		92
Total		$	1,269	$	(14)

Note NR — Contingencies

Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note SR ("Contingencies and Commitments") in the Company's ~~2018~~2019 Annual Report on Form 10-K.

NaN beryllium cases were outstanding as of June 26, 2020. The Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.

Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be 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 ~~$6.2~~$6.0 million and ~~$6.5~~$5.9 million at June ~~28, 2019~~26, 2020 and December 31, ~~2018,~~2019, respectively. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.

Note S — Debt

In the second quarter of 2020, the Company borrowed $150.0 million under its revolving credit facility, and the remaining borrowing capacity as of June 26, 2020 was $179.1 million. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2024.

Note T — Subsequent Event

In July 2020, the Company completed the acquisition of Optics Balzers, an industry leader in thin film optical coatings, with a final transaction value of approximately $160 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.



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

OVERVIEW

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

Coronavirus (COVID-19) Second Quarter 2020 Update

The significant macroeconomic impact of the ongoing COVID-19 pandemic impacted several of the Company’s end markets beginning in the first half of 2020 primarily in the form of reduced demand, particularly in the consumer electronics, automotive, energy, aerospace and defense, and industrial end markets. In the first six months of 2020, the Company recorded additional reserves for slow-moving and excess inventory of approximately $1.3 million related to the collapse in demand in the oil and gas industry. The Company also reviewed for any other potential impairment indicators and did not identify any. We may temporarily shut down our facilities in response to reduced demand, due to employees being impacted by COVID-19, or changes in government policy. The Company is not experiencing any significant supply chain disruptions. We expect reduced demand to continue at least through the remainder of 2020, but the extent and timing cannot be reasonably estimated due to the evolving nature of this pandemic.

In the second quarter of 2020, the Company incurred $2.7 million of expense related to COVID-19. These costs were primarily related to premium pay for production workers who were deemed essential to work onsite during the pandemic.

The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, we cannot predict the extent to which our business, results of operations, financial condition, or cash flows will ultimately be impacted.

The Company suspended its share buyback program in the first quarter of 2020. In addition, the Company is currently evaluating the impact of the CARES Act. See Note F to the Consolidated Financial Statements for additional discussion.

From a liquidity perspective, we believe we are well positioned to manage through this global crisis. In order to ensure we have more than adequate liquidity, we borrowed $150.0 million under the revolving credit facility in April 2020. We ended the second quarter with total cash of $265.1 million and $151.8 million of total debt, or in a net cash position of $113.3 million. In addition, we had $179.1 million of available borrowings under our revolving credit facility as of the end of the second quarter.

Additionally, in July 2020, we completed the acquisition of Optics Balzers for a total transaction value of approximately $160 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.

2127

RESULTS OF OPERATIONS

Second Quarter


	Second Quarter Ended												Second Quarter Ended
	June 28,			June 29,			$			%			June 26,			June 28,			$		%
(Thousands, except per share data)	2019			2018			Change			Change		(Thousands, except per share data)	2020			2019			Change		Change
Net sales	$	297,843		$	309,085		$	(11,242	)	(4	)%	Net sales	$	271,468		$	297,843		$	(26,375)	(9)	%
Value-added sales	194,896			189,902			4,994			3	%	Value-added sales	161,569			194,896			(33,327)		(17)	%
Gross margin	69,594			61,838			7,756			13	%	Gross margin	48,090			69,594			(21,504)		(31)	%
Gross margin as a % of value-added sales	36		%	33		%	N/A			N/A		Gross margin as a % of value-added sales	30		%	36		%
Selling, general, and administrative (SG&A) expense	39,891			38,473			1,418			4	%	Selling, general, and administrative (SG&A) expense	32,852			39,891			(7,039)		(18)	%
SG&A expense as a % of value-added sales	20		%	20		%	N/A			N/A		SG&A expense as a % of value-added sales	20		%	20		%
Research and development (R&D) expense	4,062			3,860			202			5	%	Research and development (R&D) expense	4,502			4,062			440		11	%
R&D expense as a % of value-added sales	2		%	2		%	N/A			N/A		R&D expense as a % of value-added sales	3		%	2		%
Restructuring expense												Restructuring expense	2,387			—			2,387		N/A
Other—net	2,891			4,313			(1,422		)	(33	)%	Other—net	(357)			2,891			(3,248)		(112)	%
Operating profit	22,750			15,192			7,558			50	%	Operating profit	8,706			22,750			(14,044)		(62)	%
Other non-operating (income) expense—net												Other non-operating (income) expense—net	(851)			3,112			(3,963)		(127)	%
Interest expense—net	500			667			(167		)	(25	)%	Interest expense—net	1,259			500			759		152	%
Other non-operating expense—net	3,112			437			2,675			612	%
Income before income taxes	19,138			14,088			5,050			36	%	Income before income taxes	8,298			19,138			(10,840)		(57)	%
Income tax expense	3,598			2,944			654			22	%	Income tax expense	1,620			3,598			(1,978)		(55)	%
Net income	$	15,540		$	11,144		$	4,396		39	%	Net income	$	6,678		$	15,540		$	(8,862)	(57)	%

Diluted earnings per share	$	0.75		$	0.54		$	0.21		39	%	Diluted earnings per share	$	0.32		$	0.75		$	(0.43)	(57)	%

N/A = Not Applicable

Net sales of $271.5 million in the second quarter of 2020 decreased $26.3 million from $297.8 million in the second quarter of ~~2019 decreased $11.2 million from $309.1 million recorded in the second quarter of 2018.~~2019. Net sales growth in our Advanced Materials segment was more than offset by decreased net sales in our Performance Alloys and Composites and Precision Coatings segments ~~was more than offset by decreased net sales in our Advanced Materials segment~~ driven by a lower ~~mix of precious metal-containing products and the mix of customer-supplied material.~~sales volumes. The change in precious metal and copper prices ~~unfavorably~~favorably impacted net sales during the second quarter of ~~2019~~2020 by ~~$0.8~~$19.3 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 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 ~~$194.9~~$161.6 million in the second quarter of ~~2019 increased $5.0~~2020 decreased $33.3 million, or 3%17%, compared to the second quarter of ~~2018.~~2019. The increase in semiconductor end market sales was more than offset by the decrease in value-added sales ~~was primarily driven by commercial excellence initiatives and stronger~~due to reduced demand in the consumer electronics, aerospace and defense, energy, industrial, and ~~consumer electronics~~telecom and data center end markets.

Gross margin in the second quarter of ~~2019~~2020 was ~~$69.6~~$48.1 million, ~~or $7.8 million higher than the $61.8 million gross margin recorded during~~which was down 31% compared to the second quarter of ~~2018.~~2019. Gross margin expressed as a percentage of value-added sales ~~increased~~decreased to 30% in the second quarter of 2020 from 36% in the second quarter of ~~2019 from 33%~~2019. The decrease was primarily driven by lower volumes.

SG&A expense was $32.9 million in the second quarter of ~~2018 primarily due~~2020, compared to ~~a combination of higher sales volume and improved sales mix from both an end market and product perspective and improved manufacturing performance.~~

~~SG&A expense~~ ~~was~~ $39.9 million in the second quarter of ~~2019, compared to $38.5 million recorded in the second quarter of 2018.~~2019. The ~~increase~~decrease in SG&A expense for the second quarter of ~~2019~~2020 was primarily driven by ~~investments to execute strategic initiatives.~~lower variable compensation expense and cost management actions. Expressed as a percentage of value-added sales, SG&A expense was 20% in the second ~~quarter~~quarters of both ~~2019~~2020 and ~~2018.~~2019.

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~~accounted for 3% and 2% of value-added sales ~~at approximately 2%~~ in the second quarter of ~~both~~2020 and 2019, respectively. The increase reflects additional investment in new product and ~~2018.~~application development.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the second quarter of 2020, we recorded $2.4 million of restructuring charges in our Performance Alloys and Composites segment

related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note E to the Consolidated Financial Statements for additional discussion.

Other-net was ~~$2.9~~$0.4 million of ~~expense~~income in the second quarter of ~~2019,~~2020, or a ~~$1.4~~$3.2 million decrease from the second quarter of ~~2018. The decrease in Other-net~~2019, which was primarily ~~due to less~~driven by a $2.2 million foreign ~~exchange losses recognized~~currency hedge gain realized in the second quarter of ~~2019 compared to the second quarter of 2018.~~2020. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.

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

Other non-operating (income) 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 during the second quarter of 2019. Refer to Note IM to the Consolidated Financial Statements for details of the ~~components~~components.

Interest expense-net was $1.3 million and $0.5 million in the second quarter of ~~net periodic benefit costs.~~2020 and 2019, respectively. The increase in interest expense is primarily due to higher borrowings under our revolving credit facility.

Income tax expense for the second quarter of ~~2019~~2020 was ~~$3.6~~$1.6 million compared to ~~$2.9~~$3.6 million in the second quarter of ~~2018.~~2019. The effective tax rate for the second quarter of ~~2019~~2020 was ~~18.8%~~19.5% compared to ~~an effective tax rate of 20.9%~~18.8% 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. Refer to Note F to the Consolidated Financial Statements for further details on income taxes.

Six Months


	Six Months Ended
	June 26,			June 28,			$		%
(Thousands, except per share data)	2020			2019			Change		Change
Net sales	$	549,414		$	599,284		$	(49,870)	(8)	%
Value-added sales	320,235			382,577			(62,342)		(16)	%
Gross margin	93,665			138,906			(45,241)		(33)	%
Gross margin as a % of value-added sales	29		%	36		%
SG&A expense	63,596			79,955			(16,359)		(20)	%
SG&A expense as a % of value-added sales	20		%	21		%
R&D expense	8,687			7,802			885		11	%
R&D expense as a % of value-added sales	3		%	2		%
Goodwill impairment charges	9,053			—			9,053		N/A
Held for sale impairment charges	1,713			—			1,713		N/A
Restructuring expense	4,551			—			4,551		N/A
Other—net	1,922			7,012			(5,090)		(73)	%
Operating profit	4,143			44,137			(39,994)		(91)	%
Other non-operating (income) expense—net	(1,795)			3,357			(5,152)		(153)	%
Interest expense—net	1,505			966			539		56	%
Income before income taxes	4,433			39,814			(35,381)		(89)	%
Income tax expense	858			7,368			(6,510)		(88)	%
Net income	$	3,575		$	32,446		$	(28,871)	(89)	%

Diluted earnings per share	$	0.17		$	1.57		$	(1.40)	(89)	%

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 $549.4 million in the first six months of 2020 decreased $49.9 million from $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.~~2019. Net sales growth in our ~~Performance Alloys and Composites~~Advanced Materials segment was more than offset by decreased net sales in our ~~Advanced Materials~~Performance Alloys and Composites and Precision Coatings segments ~~primarily~~ driven by lower ~~mix of precious metal-containing products and the mix of customer-supplied material.~~sales volumes. The change in precious metal and copper prices ~~unfavorably~~favorably impacted net sales during the first ~~half~~six months of ~~2019~~2020 by ~~$5.0~~$39.2 million.

Value-added sales of ~~$382.6~~$320.2 million in the first ~~half~~six months of ~~2019 increased $11.4~~2020 decreased $62.3 million, or 3%16%, compared to the first ~~half~~six months of ~~2018.~~2019. The increase in semiconductor end market sales was more than offset by the decrease in value-added sales ~~was primarily driven by commercial excellence initiatives and stronger~~due to reduced demand in the aerospace and defense, energy, telecom and data center, and industrial end markets.

Gross margin in the first half of ~~2019~~2020 was ~~$138.9~~$93.7 million, ~~or $18.8 million higher than the $120.1 million gross margin recorded during~~which was down 33% compared to the first ~~half~~six months of ~~2018.~~2019. Gross margin expressed as a percentage of value-added sales ~~increased~~decreased to 29% in the first half of 2020 from 36% in the first half of 2019. The decrease was primarily driven by lower volumes, as well as a $1.3 million charge to reserve for slow moving and excess inventory related to the collapse in demand in the oil and gas industry.

SG&A expense was $63.6 million in the first six months of ~~2019 from 32% in the first six months of 2018 primarily due~~2020, compared 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.~~2019. The ~~increase~~decrease in SG&A expense for the first half of ~~2019~~2020 was primarily driven by ~~investments to execute strategic initiatives for commercial excellence~~lower variable compensation expense and ~~variable costs associated with driving top-line and profit growth.~~cost management actions. Expressed as a percentage of value-added sales, SG&A expense was 20% and 21% in the first ~~half~~six months of ~~both~~2020 and 2019, ~~and 2018.~~respectively.

R&D expense ~~was flat as a percentage~~accounted for 3% and 2% of value-added sales ~~at approximately 2%~~ in the first ~~half~~six months of ~~both~~2020 and 2019, respectively. The increase reflects additional investment in new product and ~~2018.~~application development.

Goodwill and Held for sale impairment charges includes non-recurring charges relating to goodwill and other assets in our Precision Coatings segment. Refer to Notes I and J to the Consolidated Financial Statements for additional discussion.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first six months of 2020, we recorded $4.6 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note E to the Consolidated Financial Statements for additional discussion.

Other-net was ~~$7.0~~$1.9 million of expense in the first six months of ~~2019,~~2020, or a ~~$0.2~~$5.1 million decrease from the first six months of ~~2018.~~2019. The decrease in Other-net was primarily driven by a $2.2 million foreign exchange hedge gain realized in the second quarter of 2020, as well as reduced metal consignment fees in the first half of 2020 compared to the first half of 2019. 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 (income) 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.~~benefits during the second quarter of 2019. Refer to Note IM to the Consolidated Financial Statements for details of the ~~components of net periodic benefit costs.~~components.

~~Income tax expense~~Interest expense-net ~~for the first six months of 2019~~ was ~~$7.4~~$1.5 million ~~compared to $4.5~~and $1.0 million in the first six months of ~~2018.~~2020 and 2019, respectively. The increase is primarily due to higher borrowings under our revolving credit facility.

Income tax expense for the first six months of 2020 was $0.9 million compared to $7.4 million in the first six months of 2019. The effective tax rate for the first ~~half~~six months of ~~2019~~2020 was ~~18.5%~~19.4% compared to ~~an effective tax rate of 17.0%~~18.5% 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 the first six months of 2020 included a net discrete income tax expense of $0.8 million primarily related to an impairment of goodwill. The effective tax rate for the first six months of 2019 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based ~~compensation. The effective tax rate~~compensation awards. Refer to Note F to the Consolidated Financial Statements for ~~2018 included a net discrete~~further details on income ~~tax benefit of $1.0 million, primarily related to Staff Accounting Bulletin No. 118 adjustments.~~taxes.

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 six months of ~~2019~~2020 and ~~2018~~2019 is as follows:


	Second Quarter Ended						Six Months Ended							Second Quarter Ended						Six Months Ended
	June 28,			June 29,			June 28,			June 29,				June 26,		June 28,		June 26,		June 28,
(Thousands)	2019			2018			2019			2018			(Thousands)	2020		2019		2020		2019
Net sales													Net sales
Performance Alloys and Composites	$	135,231		$	129,765		$	262,344		$	248,001		Performance Alloys and Composites	$	101,614	$	135,231	$	200,681	$	262,344
Advanced Materials	133,238			150,324			277,263			303,869			Advanced Materials	150,108		133,238		310,273		277,263
Precision Coatings	29,374			28,996			59,677			60,682			Precision Coatings	19,746		29,374		38,460		59,677
Other	—			—			—			—			Other	—		—		—		—
Total	$	297,843		$	309,085		$	599,284		$	612,552		Total	$	271,468	$	297,843	$	549,414	$	599,284

Less: pass-through metal costs													Less: pass-through metal costs
Performance Alloys and Composites	$	19,988		$	19,615		$	37,500		$	37,552		Performance Alloys and Composites	$	11,858	$	19,988	$	27,210	$	37,500
Advanced Materials	74,931			93,057			161,449			188,319			Advanced Materials	95,443		74,931		196,420		161,449
Precision Coatings	6,285			5,603			14,051			13,648			Precision Coatings	1,968		6,285		3,693		14,051
Other	1,743			908			3,707			1,818			Other	630		1,743		1,856		3,707
Total	$	102,947		$	119,183		$	216,707		$	241,337		Total	$	109,899	$	102,947	$	229,179	$	216,707

Value-added sales													Value-added sales
Performance Alloys and Composites	$	115,243		$	110,150		$	224,844		$	210,449		Performance Alloys and Composites	$	89,756	$	115,243	$	173,471	$	224,844
Advanced Materials	58,307			57,267			115,814			115,550			Advanced Materials	54,665		58,307		113,853		115,814
Precision Coatings	23,089			23,393			45,626			47,034			Precision Coatings	17,778		23,089		34,767		45,626
Other	(1,743		)	(908		)	(3,707		)	(1,818		)	Other	(630)		(1,743)		(1,856)		(3,707)
Total	$	194,896		$	189,902		$	382,577		$	371,215		Total	$	161,569	$	194,896	$	320,235	$	382,577

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

Second Quarter


	Second Quarter Ended									Second Quarter Ended
	June 28,		June 29,		$		%			June 26,		June 28,		$		%
(Thousands)	2019		2018		Change		Change		(Thousands)	2020		2019		Change		Change
Net sales	$	135,231	$	129,765	$	5,466	4	%	Net sales	$	101,614	$	135,231	$	(33,617)	(25)	%
Value-added sales	115,243		110,150		5,093		5	%	Value-added sales	89,756		115,243		(25,487)		(22)	%
Operating profit	19,328		12,309		7,019		57	%	Operating profit	8,244		19,328		(11,084)		(57)	%

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.

As of June 26, 2020, our subsidiary, Materion Brush Inc., was a defendant in two beryllium cases, as discussed more fully below.

In 2019, one new beryllium case was filed. In Ronald Dwayne Manning v. Arconic Inc. et al., case number 19CI000219, filed in the Superior Court of the State of California, Tehama County, the Company is one of four named defendants and 120 Doe defendants. The plaintiff alleges that he contracted beryllium disease from exposures to beryllium-containing products during his employment as an auto mechanic, welder, sprinkler installer, and movie projector operator, and asserts claims for negligence, strict liability, fraudulent concealment, and breach of implied warranties. The plaintiff seeks economic damages, non-economic damages, consequential damages, and punitive damages. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

In the second quarter of 2020, one new beryllium case was filed. In Richard Miller v. Dolphin, Inc. et al., case number CV2020-005163, filed in the Superior Court of Arizona, Maricopa County, the Company is one of six named defendants and 100 Doe defendants. The plaintiff alleges that he contracted beryllium disease from exposures to beryllium-containing products supplied to his employer, Karsten Manufacturing Corporation, where he was a production worker, and asserts claims for negligence, strict liability – failure to warn, strict liability – design defect, and fraudulent concealment. The plaintiff seeks general damages, medical expenses, loss of earnings, consequential damages, and punitive damages. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

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


Item 1A.			Risk Factors

The information set forth in this quarterly report on Form 10-Q, including, without limitation, the risk factor presented below, updates and should be read in conjunction with, the risk factors and information disclosed in Part 1, Item 1A., “Risk Factors,” in our 2019 Annual Report on Form 10-K.

Our business, results of operations, financial position, and cash flows have been and are expected to continue to be adversely affected by the COVID-19 pandemic.

In December 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) in China that has since spread to the majority of the regions of the world. The outbreak was subsequently declared a pandemic by the World Health Organization in March 2020. To date, the COVID-19 outbreak and preventative measures taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas and significant disruption in global financial markets. Although we are unable to predict the ultimate impact of the COVID-19 outbreak at this time, the pandemic has adversely affected, and is expected to continue to adversely affect, our business, results of operations, financial position, and cash flows. Such effects may be material and the potential impacts include, but are not limited to:

•disruptions to our facilities, including as a result of facility closures, reductions in operating hours, labor shortages, and changes in operating procedures, including additional cleaning and disinfecting procedures;

•disruptions in our supply chain due to transportation delays, travel restrictions, raw material cost increases, and closures of businesses or facilities;

•reductions in our operating effectiveness due to workforce disruptions resulting from “shelter in place," “stay at home” orders, the need for social distancing, and the unavailability of key personnel necessary to conduct our business activities; and

•volatility in the ~~Legal Proceedings section~~global financial markets, which could have a negative impact on our ability to access capital and additional sources of ~~Note N ("Contingencies")~~financing in the future.

In addition, we cannot predict the impact that COVID-19 will have on our customers, employees, suppliers, and distributors, and any adverse impacts on these parties may have a material adverse impact on our business. The impact of ~~the Notes to Consolidated Financial Statements (Unaudited)~~COVID-19 may also exacerbate other risks discussed in Part I, Item 1A, “Risk Factors,” in our 2019 Annual Report on Form 10-K, any of which could have a material effect on us. This situation is ~~incorporated herein by reference.~~changing rapidly and additional impacts may arise that we are not aware of currently.



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 June ~~28, 2019~~26, 2020.

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


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 28 through May 1, 2020	—	$	—	—	$	8,316,239
May 2 through May 29, 2020	196	51.19		—	8,316,239
May 30 through June 26, 2020	—	—		—	8,316,239
Total	196	$	51.19	—	$	8,316,239



(1)			Includes ~~2,542, 9,686, and 256~~196 shares surrendered to the Company in ~~April,~~ May ~~and 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. WeDuring the three months ended June 26, 2020, we did not repurchase any shares under this ~~program during the second quarter of 2019.~~program. As of June ~~28, 2019, $15.1~~26, 2020, $8.3 million may still be purchased under the program.



Item 4.			Mine Safety Disclosures

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



~~Item 6.~~	~~Exhibits~~



~~31.1~~Item 6.			Exhibits

All documents referenced below were filed pursuant to the Exchange Act by Materion Corporation, file number 001-15885, unless otherwise noted.


10.1						Form of Non-Employee Directors' Restricted Stock Units Agreement under the Materion Corporation 2006 Non-Employee Director Equity Plan (As Amended and Restated as of May 3, 2017), covering grants made in 2020*
31.1						Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)*
31.2						Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)*
32						Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350*
95						Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended June ~~28, 2019~~26 , 2020*
101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
101.SCH						Inline XBRL Taxonomy Extension Schema Document*
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Exhibit 101 attachments)

*Submitted electronically herewith.

SIGNATURES

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

MATERION CORPORATION

~~MATERION CORPORATION~~

Dated: July 23, 2020

~~Dated: July 25, 2019~~

/s/ ~~Joseph P. Kelley~~Stephen F. Shamrock

~~Joseph P. Kelley~~Stephen F. Shamrock

~~Vice President, Finance and~~Interim Chief Financial Officer

(Principal Financial and Accounting Officer)

3543



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



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



(Thousands)	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	)%


▪	~~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, and 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;~~


▪	~~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~~



Item 3.			Quantitative and Qualitative Disclosures about Market Risk