UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended September ~~30, 2022~~29, 2023

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

For the transition period from to

Commission file number 001-15885

MATERION CORPORATION

(Exact name of Registrant as specified in charter)


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

6070 Parkland Blvd., Mayfield Heights, Ohio 44124

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:

(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 September ~~30, 2022:~~29, 2023: ~~20,528,138~~20,642,396.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


		Third Quarter Ended				Nine Months Ended					Third Quarter Ended				Nine Months Ended
(Thousands, except per share amounts)	(Thousands, except per share amounts)	September 30, 2022		October 1, 2021		September 30, 2022		October 1, 2021		(Thousands, except per share amounts)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Net sales	Net sales	$	428,191	$	388,028	$	1,322,531	$	1,113,413	Net sales	$	403,067	$	428,191	$	1,244,144	$	1,322,531
Cost of sales	Cost of sales	345,448		313,715		1,077,070		902,723		Cost of sales	314,131		345,448		974,817		1,077,070
Gross margin	Gross margin	82,743		74,313		245,461		210,690		Gross margin	88,936		82,743		269,327		245,461
Selling, general, and administrative expense	Selling, general, and administrative expense	38,958		43,195		122,666		118,031		Selling, general, and administrative expense	38,806		38,958		118,053		122,666
Research and development expense	Research and development expense	7,430		6,354		22,096		19,164		Research and development expense	6,322		7,430		21,098		22,096
Restructuring expense (income)	Restructuring expense (income)	484		—		1,560		(378)		Restructuring expense (income)	1,077		484		3,194		1,560
Other—net	Other—net	6,774		3,604		18,575		12,272		Other—net	6,211		6,774		18,178		18,575
Operating profit	Operating profit	29,097		21,160		80,564		61,601		Operating profit	36,520		29,097		108,804		80,564
Other non-operating (income)—net	Other non-operating (income)—net	(1,175)		(1,279)		(3,512)		(3,832)		Other non-operating (income)—net	(685)		(1,175)		(2,141)		(3,512)
Interest expense—net	Interest expense—net	5,888		861		14,325		2,480		Interest expense—net	7,678		5,888		22,820		14,325
Income before income taxes	Income before income taxes	24,384		21,578		69,751		62,953		Income before income taxes	29,527		24,384		88,125		69,751
Income tax expense	Income tax expense	4,432		3,422		12,525		10,162		Income tax expense	2,963		4,432		11,891		12,525
Net income	Net income	$	19,952	$	18,156	$	57,226	$	52,791	Net income	$	26,564	$	19,952	$	76,234	$	57,226
Basic earnings per share:	Basic earnings per share:									Basic earnings per share:
Net income per share of common stock	Net income per share of common stock	$	0.97	$	0.89	$	2.79	$	2.59	Net income per share of common stock	$	1.29	$	0.97	$	3.70	$	2.79
Diluted earnings per share:	Diluted earnings per share:									Diluted earnings per share:
Net income per share of common stock	Net income per share of common stock	$	0.96	$	0.88	$	2.76	$	2.56	Net income per share of common stock	$	1.27	$	0.96	$	3.65	$	2.76
Weighted-average number of shares of common stock outstanding:	Weighted-average number of shares of common stock outstanding:									Weighted-average number of shares of common stock outstanding:
Basic	Basic	20,526		20,439		20,502		20,414		Basic	20,640		20,526		20,611		20,502
Diluted	Diluted	20,780		20,657		20,756		20,659		Diluted	20,905		20,780		20,891		20,756

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


		Third Quarter Ended				Nine Months Ended					Third Quarter Ended				Nine Months Ended
		September 30,		October 1,		September 30,		October 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2022		2021		2022		2021		(Thousands)	2023		2022		2023		2022
Net income	Net income	$	19,952	$	18,156	$	57,226	$	52,791	Net income	$	26,564	$	19,952	$	76,234	$	57,226
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Foreign currency translation adjustment	Foreign currency translation adjustment	(6,094)		(2,029)		(14,484)		(7,693)		Foreign currency translation adjustment	(3,259)		(6,094)		(1,313)		(14,484)
Derivative and hedging activity, net of tax	Derivative and hedging activity, net of tax	4,125		439		8,289		1,411		Derivative and hedging activity, net of tax	2,019		4,125		2,860		8,289
Pension and post-employment benefit adjustment, net of tax	Pension and post-employment benefit adjustment, net of tax	8		121		(216)		368		Pension and post-employment benefit adjustment, net of tax	(145)		8		(466)		(216)
Other comprehensive loss	Other comprehensive loss	(1,961)		(1,469)		(6,411)		(5,914)		Other comprehensive loss	(1,385)		(1,961)		1,081		(6,411)
Comprehensive income	Comprehensive income	$	17,991	$	16,687	$	50,815	$	46,877	Comprehensive income	$	25,179	$	17,991	$	77,315	$	50,815

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)


		September 30,		Dec. 31,			September 29,		December 31,
(Thousands)	(Thousands)	2022		2021		(Thousands)	2023		2022
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	20,682	$	14,462	Cash and cash equivalents	$	16,401	$	13,101
Accounts receivable, net	Accounts receivable, net	238,975		223,553		Accounts receivable, net	186,177		215,211
Inventories, net	Inventories, net	420,299		361,115		Inventories, net	452,042		423,080
Prepaid and other current assets	Prepaid and other current assets	29,708		28,122		Prepaid and other current assets	54,972		39,056
Total current assets	Total current assets	709,664		627,252		Total current assets	709,592		690,448
Deferred income taxes	Deferred income taxes	4,701		5,431		Deferred income taxes	3,214		3,265
Property, plant, and equipment	Property, plant, and equipment	1,173,073		1,132,223		Property, plant, and equipment	1,252,455		1,209,205
Less allowances for depreciation, depletion, and amortization	Less allowances for depreciation, depletion, and amortization	(746,966)		(723,248)		Less allowances for depreciation, depletion, and amortization	(755,626)		(760,440)
Property, plant, and equipment, net	Property, plant, and equipment, net	426,107		408,975		Property, plant, and equipment, net	496,829		448,765
Operating lease, right-of-use assets	Operating lease, right-of-use assets	65,716		63,096		Operating lease, right-of-use assets	57,747		64,249
Intangible assets, net	Intangible assets, net	145,089		156,736		Intangible assets, net	134,594		143,219
Other assets	Other assets	32,475		27,369		Other assets	27,186		22,535
Goodwill	Goodwill	318,571		318,620		Goodwill	319,435		319,498
Total Assets	Total Assets	$	1,702,323	$	1,607,479	Total Assets	$	1,748,597	$	1,691,979
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity					Liabilities and Shareholders’ Equity
Current liabilities	Current liabilities					Current liabilities
Short-term debt	Short-term debt	$	19,747	$	15,359	Short-term debt	$	38,634	$	21,105
Accounts payable	Accounts payable	96,482		86,243		Accounts payable	93,096		107,899
Salaries and wages	Salaries and wages	29,974		37,544		Salaries and wages	27,971		35,543
Other liabilities and accrued items	Other liabilities and accrued items	47,949		53,388		Other liabilities and accrued items	40,425		54,993
Income taxes	Income taxes	1,542		4,205		Income taxes	2,001		3,928
Unearned revenue	Unearned revenue	6,596		7,770		Unearned revenue	15,078		15,496
Total current liabilities	Total current liabilities	202,290		204,509		Total current liabilities	217,205		238,964
Other long-term liabilities	Other long-term liabilities	13,991		14,954		Other long-term liabilities	11,558		12,181
Operating lease liabilities	Operating lease liabilities	60,248		57,099		Operating lease liabilities	54,111		59,055
Finance lease liabilities	Finance lease liabilities	13,009		16,327		Finance lease liabilities	13,279		13,876
Retirement and post-employment benefits	Retirement and post-employment benefits	29,421		33,394		Retirement and post-employment benefits	20,089		20,422
Unearned income	Unearned income	110,723		97,962		Unearned income	109,076		107,736
Long-term income taxes	Long-term income taxes	1,257		1,190		Long-term income taxes	1,155		665
Deferred income taxes	Deferred income taxes	30,427		27,216		Deferred income taxes	27,795		28,214
Long-term debt	Long-term debt	474,280		434,388		Long-term debt	422,361		410,876
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)	Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—		—		Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—		—
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both September 30th and December 31st)		284,024		271,978
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both September 29th and December 31st)						Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both September 29th and December 31st)	306,593		288,100
Retained earnings	Retained earnings	743,283		693,756		Retained earnings	837,598		769,418
Common stock in treasury	Common stock in treasury	(219,219)		(209,920)		Common stock in treasury	(237,259)		(220,864)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(46,580)		(40,169)		Accumulated other comprehensive loss	(40,828)		(41,909)
Other equity	Other equity	5,169		4,795		Other equity	5,864		5,245
Total shareholders' equity	Total shareholders' equity	766,677		720,440		Total shareholders' equity	871,968		799,990
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	1,702,323	$	1,607,479	Total Liabilities and Shareholders’ Equity	$	1,748,597	$	1,691,979

See the notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


		Nine Months Ended					Nine Months Ended
		September 30,		October 1,			September 29,		September 30,
(Thousands)	(Thousands)	2022		2021		(Thousands)	2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	57,226	$	52,791	Net income	$	76,234	$	57,226
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization	Depreciation, depletion, and amortization	39,223		32,478		Depreciation, depletion, and amortization	46,524		39,223
Amortization of deferred financing costs in interest expense	Amortization of deferred financing costs in interest expense	1,310		546		Amortization of deferred financing costs in interest expense	1,284		1,310
Stock-based compensation expense (non-cash)	Stock-based compensation expense (non-cash)	5,997		4,924		Stock-based compensation expense (non-cash)	7,578		5,997

Deferred income tax expense (benefit)	Deferred income tax expense (benefit)	1,825		(263)		Deferred income tax expense (benefit)	(149)		1,825
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable	Accounts receivable	(20,964)		(26,041)		Accounts receivable	27,832		(20,964)
Inventory	Inventory	(64,832)		(62,353)		Inventory	(30,868)		(64,832)
Prepaid and other current assets	Prepaid and other current assets	(3,019)		(7,020)		Prepaid and other current assets	(16,175)		(3,019)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	(1,785)		35,314		Accounts payable and accrued expenses	(25,533)		(1,785)
Unearned revenue	Unearned revenue	(2,191)		650		Unearned revenue	(12,398)		(2,191)
Interest and taxes payable	Interest and taxes payable	(1,741)		(1,504)		Interest and taxes payable	(1,730)		(1,741)
Unearned income due to customer prepayments	Unearned income due to customer prepayments	17,501		9,022		Unearned income due to customer prepayments	16,676		17,501
Other-net	Other-net	5,654		1,974		Other-net	(4,770)		5,654
Net cash provided by operating activities	Net cash provided by operating activities	34,204		40,518		Net cash provided by operating activities	84,505		34,204
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Payments for purchase of property, plant, and equipment	Payments for purchase of property, plant, and equipment	(54,236)		(77,640)		Payments for purchase of property, plant, and equipment	(85,251)		(54,236)
Payments for mine development						Payments for mine development	(9,326)		—
Proceeds from sale of property, plant, and equipment	Proceeds from sale of property, plant, and equipment	827		686		Proceeds from sale of property, plant, and equipment	417		827
Payments for acquisition		(2,971)		—
Payments for acquisition, net of cash acquired						Payments for acquisition, net of cash acquired	—		(2,971)
Net cash used in investing activities	Net cash used in investing activities	(56,380)		(76,954)		Net cash used in investing activities	(94,160)		(56,380)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from borrowings under revolving credit agreement, net		49,092		43,010
Proceeds from issuance of debt		6,643		—
Proceeds from borrowings under credit facilities, net						Proceeds from borrowings under credit facilities, net	39,649		55,735

Repayment of long-term debt	Repayment of long-term debt	(11,761)		(1,803)		Repayment of long-term debt	(11,579)		(11,761)
Principal payments under finance lease obligations	Principal payments under finance lease obligations	(1,985)		(2,152)		Principal payments under finance lease obligations	(1,297)		(1,985)
Cash dividends paid	Cash dividends paid	(7,584)		(7,243)		Cash dividends paid	(7,937)		(7,584)
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(3,056)		(3,033)		Payments of withholding taxes for stock-based compensation awards	(5,101)		(3,056)
Net cash provided by financing activities	Net cash provided by financing activities	31,349		28,779		Net cash provided by financing activities	13,735		31,349
Effects of exchange rate changes	Effects of exchange rate changes	(2,953)		(212)		Effects of exchange rate changes	(780)		(2,953)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	6,220		(7,869)		Net change in cash and cash equivalents	3,300		6,220
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	14,462		25,878		Cash and cash equivalents at beginning of period	13,101		14,462
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	20,682	$	18,009	Cash and cash equivalents at end of period	$	16,401	$	20,682

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity

(Unaudited)


		Common Shares		Shareholders' Equity													Common Shares		Shareholders' Equity
(Thousands, except per share amounts)	(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total		(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total
Balance at June 30, 2023																Balance at June 30, 2023	20,637	(6,511)	$	303,390	$	813,793	$	(236,423)	$	(39,443)	$	5,806	$	847,123
Net income																Net income	—	—	—		$	26,564	—		—		—		26,564
Other comprehensive income																Other comprehensive income	—	—	—		—		—		(1,385)		—		(1,385)
Cash dividends declared ($0.130 per share)																Cash dividends declared ($0.130 per share)	—	—	—		(2,683)		—		—		—		(2,683)
Stock-based compensation activity																Stock-based compensation activity	8	8	3,174		(76)		(562)		—		—		2,536
Payments of withholding taxes for stock-based compensation awards																Payments of withholding taxes for stock-based compensation awards	(3)	(3)	—		—		(229)		—		—		(229)
Directors’ deferred compensation																Directors’ deferred compensation	—	—	29		—		(45)		—		58		42
Balance at September 29, 2023																Balance at September 29, 2023	20,642	(6,506)	$	306,593	$	837,598	$	(237,259)	$	(40,828)	$	5,864	$	871,968

Balance at July 1, 2022	Balance at July 1, 2022	20,523	(6,625)	$	281,296	$	725,918	$	(218,356)	$	(44,619)	$	4,915	$	749,154	Balance at July 1, 2022	20,523	(6,625)	$	281,296	$	725,918	$	(218,356)	$	(44,619)	$	4,915	$	749,154
Net income	Net income	—	—	—		19,952		—		—		—		19,952		Net income	—	—	—		19,952		—		—		—		19,952
Other comprehensive income	Other comprehensive income	—	—	—		—		—		(1,961)		—		(1,961)		Other comprehensive income	—	—	—		—		—		(1,961)		—		(1,961)
Cash dividends declared ($0.125 per share)	Cash dividends declared ($0.125 per share)	—	—	—		(2,557)		—		—		—		(2,557)		Cash dividends declared ($0.125 per share)	—	—	—		(2,557)		—		—		—		(2,557)
Stock-based compensation activity	Stock-based compensation activity	6	6	2,695		(30)		(392)		—		—		2,273		Stock-based compensation activity	6	6	2,695		(30)		(392)		—		—		2,273
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(2)	(2)	—		—		(244)		—		—		(244)		Payments of withholding taxes for stock-based compensation awards	(2)	(2)	—		—		(244)		—		—		(244)
Directors’ deferred compensation	Directors’ deferred compensation	1	1	33		—		(227)		—		254		60		Directors’ deferred compensation	1	1	33		—		(227)		—		254		60
Balance at September 30, 2022	Balance at September 30, 2022	20,528	(6,620)	$	284,024	$	743,283	$	(219,219)	$	(46,580)	$	5,169	$	766,677	Balance at September 30, 2022	20,528	(6,620)	$	284,024	$	743,283	$	(219,219)	$	(46,580)	$	5,169	$	766,677

Balance at July 2, 2021		20,438	(6,710)	$	268,205	$	660,851	$	(208,854)	$	(43,084)	$	4,583	$	681,701
Net income		—	—	—		18,156		—		—		—		18,156
Other comprehensive income		—	—	—		—		—		(1,469)		—		(1,469)
Cash dividends declared ($0.120 per share)		—	—	—		(2,452)		—		—		—		(2,452)
Stock-based compensation activity		—	—	1,458		(28)		(18)		—		—		1,412
Payments of withholding taxes for stock-based compensation awards		—	—	—		—		(12)		—		—		(12)
Directors’ deferred compensation		1	1	53		—		(68)		—		107		92
Balance at October 1, 2021		20,439	(6,709)	$	269,716	$	676,527	$	(208,952)	$	(44,553)	$	4,690	$	697,428


		Common Shares		Shareholders' Equity													Common Shares		Shareholders' Equity
(Thousands, except per share amounts)	(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total		(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total
Balance at December 31, 2022																Balance at December 31, 2022	20,543	(6,605)	$	288,100	$	769,418	$	(220,864)	$	(41,909)	$	5,245	$	799,990
Net income																Net income	—	—	—		76,234		—		—		—		76,234
Other comprehensive loss																Other comprehensive loss	—	—	—		—		—		1,081		—		1,081
Cash dividends declared ($0.385 per share)																Cash dividends declared ($0.385 per share)	—	—	—		(7,937)		—		—		—		(7,937)
Stock-based compensation activity																Stock-based compensation activity	146	146	18,416		(117)		(10,721)		—		—		7,578
Payments of withholding taxes for stock-based compensation awards																Payments of withholding taxes for stock-based compensation awards	(48)	(48)	—		—		(5,101)		—		—		(5,101)
Directors’ deferred compensation																Directors’ deferred compensation	1	1	77		—		(573)		—		619		123
Balance at September 29, 2023																Balance at September 29, 2023	20,642	(6,506)	$	306,593	$	837,598	$	(237,259)	$	(40,828)	$	5,864	$	871,968

Balance at December 31, 2021	Balance at December 31, 2021	20,448	(6,700)	$	271,978	$	693,756	$	(209,920)	$	(40,169)	$	4,795	$	720,440	Balance at December 31, 2021	20,448	(6,700)	$	271,978	$	693,756	$	(209,920)	$	(40,169)	$	4,795	$	720,440
Net income	Net income	—	—	—		57,226		—		—		—		57,226		Net income	—	—	—		57,226		—		—		—		57,226
Other comprehensive loss	Other comprehensive loss	—	—	—		—		—		(6,411)		—		(6,411)		Other comprehensive loss	—	—	—		—		—		(6,411)		—		(6,411)
Cash dividends declared ($0.370 per share)	Cash dividends declared ($0.370 per share)	—	—	—		(7,584)		—		—		—		(7,584)		Cash dividends declared ($0.370 per share)	—	—	—		(7,584)		—		—		—		(7,584)
Stock-based compensation activity	Stock-based compensation activity	115	115	11,938		(115)		(5,941)		—		—		5,882		Stock-based compensation activity	115	115	11,938		(115)		(5,941)		—		—		5,882
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(37)	(37)	—		—		(3,056)		—		—		(3,056)		Payments of withholding taxes for stock-based compensation awards	(37)	(37)	—		—		(3,056)		—		—		(3,056)
Directors’ deferred compensation	Directors’ deferred compensation	2	2	108		—		(302)		—		374		180		Directors’ deferred compensation	2	2	108		—		(302)		—		374		$	180
Balance at September 30, 2022	Balance at September 30, 2022	20,528	(6,620)	$	284,024	$	743,283	$	(219,219)	$	(46,580)	$	5,169	$	766,677	Balance at September 30, 2022	20,528	(6,620)	$	284,024	$	743,283	$	(219,219)	$	(46,580)	$	5,169	$	766,677

Balance at December 31, 2020		20,328	(6,820)	$	258,642	$	631,058	$	(199,187)	$	(38,639)	$	3,756	$	655,630
Net income		—	—	—		52,791		—		—		—		52,791
Other comprehensive loss		—	—	—		—		—		(5,914)		—		(5,914)
Cash dividends declared ($0.355 per share)		—	—	—		(7,243)		—		—		—		(7,243)
Stock-based compensation activity		152	152	10,932		(79)		(5,929)		—		—		4,924
Payments of withholding taxes for stock-based compensation awards		(45)	(45)	—		—		(3,033)		—		—		(3,033)
Directors’ deferred compensation		4	4	$	142	$	—	$	(803)	$	—	$	934	$	273
Balance at October 1, 2021		20,439	(6,709)	$	269,716	$	676,527	$	(208,952)	$	(44,553)	$	4,690	$	697,428

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note A — Accounting Policies

Basis of Presentation:

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.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's ~~2021~~2022 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.

~~Business Combinations:~~

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

The amounts reflected in Note B of the consolidated financial statements are the results of a preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.

New Pronouncements Adopted:

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, ~~2022.~~2024. The Company has applied this guidance in accounting for the interest rate ~~swap~~swaps discussed in Note N. Any additional reference rate reform impacts will be accounted for in accordance with ASU ~~2020-04.~~

~~New Accounting Guidance Issued~~2020-04 and ~~Not Yet Adopted:~~

~~In November 2021, the FASB issued~~ ASU ~~2021-10,~~ ~~Government Assistance (Topic 832)~~. ASU 2021-10 is intended to increase transparency related to governmental assistance by requiring entities to disclose the types of government assistance, the entity's accounting for government assistance, and the effect of government assistance on an entity's financial statements. This new guidance is effective for all entities for annual reporting periods beginning after December 15, 2021. The Company is in the process of evaluating the impact of the guidance on its annual disclosures, but do not expect material impact to our disclosures at this time.2022-06.

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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note B — ~~Acquisition~~

On November 1, 2021, the Company acquired the industry-leading electronic materials business of H.C. Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $398.9 million, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism. During the nine months ended September 30, 2022, acquisition-related inventory step-up expense was $7.5 million and classified in Cost of Sales and transaction and integration costs were $3.3 million and classified in Selling, General and Administrative expenses in the accompanying consolidated statements of income. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300 million five-year term loan pursuant to a delayed draw term loan facility executed in October 2021 and $103 million of borrowings under its amended revolving credit facility. The maturity date on the revolving credit facility was also extended to October 2026. The interest rate for the term loan is based on LIBOR plus a tiered credit spread that is indexed to the Company's quarterly leverage ratio. This acquired business operates within the Performance Materials and Electronic Materials segments, and the results of operations are included as of the date of acquisition. The combination of Materion and HCS-Electronic Materials enhances the Company's position as the leading supplier to the high growth semiconductor industry.

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

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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

(Thousands) Initial Allocation of Consideration Measurement Period Adjustments Updated Allocation
Assets:
Cash and cash equivalents $ 3,685 $ — $ 3,685
Accounts receivable 28,352 (132) 28,220
Inventories 70,681 — 70,681
Prepaid and other current assets 660 (355) 305
Property, plant, and equipment 44,681 355 45,036
Operating lease, right-of-use assets 6,120 — 6,120
Intangible assets 107,800 — 107,800
Other long-term assets 4,528 — 4,528
Goodwill 178,181 4,010 182,191
Total assets acquired $ 444,688 $ 3,878 $ 448,566
Liabilities:
Accounts payable $ 12,139 $ — $ 12,139
Salaries and wages 2,516 625 3,141
Other liabilities and accrued items 28 — 28
Income taxes 2,183 79 2,262
Other long-term liabilities 5,543 215 5,758
Operating lease liabilities 6,042 — 6,042
Deferred income taxes 20,300 — 20,300
Total liabilities assumed $ 48,751 $ 919 $ 49,670
Net assets acquired $ 395,937 $ 2,959 $ 398,896

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The Company engaged specialists to assist in the valuation of inventories, property, plant, and equipment, and intangible assets.

In determining the fair value of the amounts above, inventory is fair valued based on the comparative sales method for work in process and finished goods at the selling price less cost to dispose and remaining manufacturing effort. The remaining working capital accounts' carrying values approximate fair value. For property, plant and equipment and intangible asset values, the Company utilized various forms of the income, cost and market approaches depending on the asset being valued. The Company used a relief from royalty method under the income approach to value its trade names and the developed technology and the multi-period excess earnings method under the income approach to value customer relationships. The significant assumptions used to estimate the fair value of these intangible assets included the discount rate and certain assumptions that form the basis of forecasted future cash flows (including revenue growth rates, royalty rates for trade names and developed technology, and attrition rates for customer relationships). Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions and are considered Level 3 assets as the assumptions are unobservable inputs developed by the Company.

As part of the acquisition, the Company recorded approximately $182.2 million of goodwill allocated between its Electronic Materials and Performance Materials segments based on the relative fair values. Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired and primarily attributable to the synergies expected to arise after the acquisition date. The goodwill is not expected to be deductible for U.S. tax purposes.

~~The following table reports the intangible assets by asset category as of the closing date:~~

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~(Thousands)~~

~~Value at Acquisition~~

~~Useful Life~~

~~Customer relationships~~

~~50,200~~

~~13 years~~

~~Technology~~

~~35,300~~

~~13 years~~

~~Trade name~~

~~22,300~~

~~15 years~~

~~Total~~

~~107,800~~

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials in the third quarter of 2022 consolidated statements are $49.2 million and $4.4 million, respectively. For the nine months ended September 30, 2022, revenue and income before taxes total $135.7 million and $10.5 million, respectively. Income before taxes includes the purchase accounting inventory step-up expense recorded in the first quarter of 2022. Had the HCS-Electronic Materials acquisition occurred as of the beginning of fiscal 2020, the Company's sales and income (loss) before taxes would have been as follows:

(Unaudited)
Three months ended Nine months ended
October 1, 2021 October 1, 2021
Net Sales $ 428,864 $ 1,223,450
Income before taxes $ 23,022 $ 65,926

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments that assume the acquisition occurred on January 1, 2020. These unaudited pro forma results do not represent financial results realized, nor are they intended to be a projection of future results. The transaction accounting adjustments and other adjustments are based on available information and assumptions that the Company’s management believes are reasonable. Such adjustments are estimates and actual experience may differ from expectations. The pro forma income before taxes for the third quarter ended and nine months ended October 1, 2021 includes approximately $2.5 million and $8.1 million, respectively, of additional interest expense related to committed financing to fund the acquisition and acquisition-related intangible asset amortization expense of $2.0 million and $6.0 million, respectively, as if the acquisition occurred on January 1, 2020.

~~Note C —~~ Segment Reporting

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

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

Performance Materials provides advanced engineered solutions comprised of beryllium and non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, tube, and other customized shapes.

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

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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

The Other reportable segment includes unallocated corporate costs and assets.

~~Beginning with the first quarter of 2022, the Company began using earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) as the main operating income metric~~The primary measurement used by management to measure the financial performance of ~~the Company~~each segment is earnings before interest, taxes, depreciation and ~~each segment. The Company made this change because recent acquisitions have resulted in increased purchase accounting~~ amortization expense, which in turn has affected the comparability of results across periods and when compared to other companies. Management believes EBITDA is useful to investors as it better represents the Company's performance, excluding the effect of the recent acquisition of significant intangible assets that are now being amortized. EBITDA is not a measurement of financial performance under U.S. GAAP. Although the Company uses EBITDA to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with U.S. GAAP.

(EBITDA).

The below table presents financial information for each segment and a reconciliation of EBITDA to Net Income (the most directly comparable GAAP financial measure) for the third quarter and first nine months of ~~2022~~2023 and ~~2021:~~2022:

(Thousands) Third Quarter 2022 Third Quarter 2021 First Nine Months 2022 First Nine Months 2021
Net sales:
Performance Materials(1)
$ 169,357 $ 136,096 $ 473,876 $ 375,533
Electronic Materials(1)
230,841 220,723 762,649 638,481
Precision Optics 27,993 31,209 86,006 99,399
Other — — — —
Net sales 428,191 388,028 1,322,531 1,113,413
Segment EBITDA:
Performance Materials $ 28,866 $ 28,917 $ 80,886 $ 68,027
Electronic Materials 16,853 11,326 51,338 32,668
Precision Optics 3,546 6,228 9,281 19,246
Other (5,839) (10,617) (18,206) (22,030)
Total Segment EBITDA 43,426 35,854 123,299 97,911
Income tax expense 4,432 3,422 12,525 10,162
Interest expense - net 5,888 861 14,325 2,480
Depreciation, depletion and amortization 13,154 $ 13,415 $ 39,223 $ 32,478
Net income $ 19,952 $ 18,156 $ 57,226 $ 52,791

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


(Thousands)	Third Quarter 2023		Third Quarter 2022		First Nine Months 2023		First Nine Months 2022
Net sales:
Performance Materials(1)	$	184,642	$	169,357	$	554,427	$	473,876
Electronic Materials(1)	192,305		230,841		611,855		762,649
Precision Optics	26,120		27,993		77,862		86,006
Other	—		—		—		—
Net sales	403,067		428,191		1,244,144		1,322,531
Segment EBITDA:
Performance Materials	$	46,366	$	28,866	$	134,061	$	80,886
Electronic Materials	10,155		16,853		37,504		51,338
Precision Optics	3,261		3,546		7,654		9,281
Other	(7,497)		(5,839)		(21,750)		(18,206)
Total Segment EBITDA	52,285		43,426		157,469		123,299
Income tax expense	2,963		4,432		11,891		12,525
Interest expense - net	7,678		5,888		22,820		14,325
Depreciation, depletion and amortization	15,080		13,154		46,524		39,223
Net income	$	26,564	$	19,952	$	76,234	$	57,226

(1) Excludes inter-segment sales of $3.2 million for the third quarter of 2023 and $7.3 million for the first nine months of 2023 for Electronic Materials. There were no material inter-segment sales for Performance Materials in 2023. Excludes inter-segment sales of $0.2 million for the third quarter of 2022 and $0.6 million for the first nine months of 2022 for Performance Materials and $3.8 million for the third quarter of 2022 and $12.1 million for the first nine months of 2022 for Electronic Materials. Inter-segment sales are eliminated in consolidation.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

The following table disaggregates revenue for each segment by end market for the third quarter and first nine months of ~~2022~~2023 and ~~2021:~~

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total
Third Quarter 2022
End Market
Semiconductor $ 2,410 $ 185,223 $ 1,151 $ — $ 188,784
Industrial 44,667 9,383 7,564 — 61,614
Aerospace and defense 28,262 1,243 3,532 — 33,037
Consumer electronics 9,607 364 6,799 — 16,770
Automotive 24,802 1,863 2,268 — 28,933
Energy 15,854 25,220 — — 41,074
Telecom and data center 15,412 42 — — 15,454
Other 28,343 7,503 6,679 — 42,525
Total $ 169,357 $ 230,841 $ 27,993 $ — $ 428,191
Third Quarter 2021
End Market
Semiconductor $ 3,163 $ 173,689 $ 630 $ — $ 177,482
Industrial 31,521 10,479 8,296 — 50,296
Aerospace and defense 19,129 1,622 5,653 — 26,404
Consumer electronics 9,717 530 7,789 — 18,036
Automotive 28,922 1,719 2,571 — 33,212
Energy 7,524 27,081 — — 34,605
Telecom and data center 14,980 31 — — 15,011
Other 21,140 5,572 6,270 — 32,982
Total $ 136,096 $ 220,723 $ 31,209 $ — $ 388,028

2022:

139

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


(Thousands)	(Thousands)	Performance Materials		Electronic Materials		Precision Optics		Other		Total		(Thousands)	Performance Materials		Electronic Materials		Precision Optics		Other		Total
First Nine Months 2022
Third Quarter 2023												Third Quarter 2023
End Market	End Market											End Market
Semiconductor	Semiconductor	$	6,657	$	613,887	$	4,007	$	—	$	624,551	Semiconductor	$	2,712	$	151,388	$	624	$	—	$	154,724
Industrial	Industrial	127,187		37,206		23,605		—		187,998		Industrial	32,046		7,958		6,954		—		46,958
Aerospace and defense	Aerospace and defense	79,561		5,141		12,344		—		97,046		Aerospace and defense	30,938		1,102		7,124		—		39,164
Consumer electronics	Consumer electronics	38,822		969		17,925		—		57,716		Consumer electronics	10,827		144		4,254		—		15,225
Automotive	Automotive	71,893		4,985		7,294		—		84,172		Automotive	19,447		1,747		2,606		—		23,800
Energy	Energy	36,632		79,701		—		—		116,333		Energy	13,013		25,179		—		—		38,192
Telecom and data center	Telecom and data center	47,716		107		—		—		47,823		Telecom and data center	15,685		10		—		—		15,695
Other	Other	65,408		20,653		20,831		—		106,892		Other	59,974		4,777		4,558		—		69,309
Total	Total	$	473,876	$	762,649	$	86,006	$	—	$	1,322,531	Total	$	184,642	$	192,305	$	26,120	$	—	$	403,067

First Nine Months 2021
Third Quarter 2022												Third Quarter 2022
End Market	End Market											End Market
Semiconductor	Semiconductor	$	5,966	$	495,718	$	1,664	$	—	$	503,348	Semiconductor	$	2,410	$	185,223	$	1,151	$	—	$	188,784
Industrial	Industrial	85,815		33,756		23,305		—		142,876		Industrial	44,550		9,383		7,564		—		61,497
Aerospace and defense	Aerospace and defense	60,221		4,680		17,825		—		82,726		Aerospace and defense	28,262		1,243		3,532		—		33,037
Consumer electronics	Consumer electronics	30,483		961		24,212		—		55,656		Consumer electronics	9,607		364		6,799		—		16,770
Automotive	Automotive	78,195		5,145		6,871		—		90,211		Automotive	24,802		1,863		2,268		—		28,933
Energy	Energy	16,541		78,487		—		—		95,028		Energy	15,971		25,220		—		—		41,191
Telecom and data center	Telecom and data center	39,348		140		—		—		39,488		Telecom and data center	15,412		42		—		—		15,454
Other	Other	58,964		19,594		25,522		—		104,080		Other	28,343		7,503		6,679		—		42,525
Total	Total	$	375,533	$	638,481	$	99,399	$	—	$	1,113,413	Total	$	169,357	$	230,841	$	27,993	$	—	$	428,191

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


(Thousands)	Performance Materials		Electronic Materials		Precision Optics		Other		Total
First Nine Months 2023
End Market
Semiconductor	$	9,713	$	487,361	$	2,279	$	—	$	499,353
Industrial	111,436		25,102		22,400		—		158,938
Aerospace and defense	92,734		4,670		17,771		—		115,175
Consumer electronics	30,473		526		11,075		—		42,074
Automotive	66,753		4,966		7,090		—		78,809
Energy	38,597		71,940		—		—		110,537
Telecom and data center	49,223		68		—		—		49,291
Other	155,498		17,222		17,247		—		189,967
Total	$	554,427	$	611,855	$	77,862	$	—	$	1,244,144

First Nine Months 2022
End Market
Semiconductor	$	6,657	$	613,887	$	4,007	$	—	$	624,551
Industrial	125,588		37,206		23,605		—		186,399
Aerospace and defense	79,561		5,141		12,344		—		97,046
Consumer electronics	38,822		969		17,925		—		57,716
Automotive	71,893		4,985		7,294		—		84,172
Energy	38,231		79,701		—		—		117,932
Telecom and data center	47,716		107		—		—		47,823
Other	65,408		20,653		20,831		—		106,892
Total	$	473,876	$	762,649	$	86,006	$	—	$	1,322,531

Note DC — 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 a product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.

Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at September ~~30, 2022.~~29, 2023. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the practical expedient at September ~~30, 2022,~~29, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$69.4~~ $55.9 million.

1411

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)	(Thousands)	September 30, 2022		December 31, 2021		$ change		% change		(Thousands)	September 29, 2023		December 31, 2022		$ change		% change
Accounts receivable, trade	Accounts receivable, trade	$	229,171	$	213,584	$	15,587	7	%	Accounts receivable, trade	$	186,937	$	215,726	$	(28,789)	(13)	%
Unbilled receivables	Unbilled receivables	9,654		7,961		1,693		21	%	Unbilled receivables	16,910		10,765		6,145		57	%
Unearned revenue	Unearned revenue	6,596		7,770		(1,174)		(15)	%	Unearned revenue	15,078		15,496		(418)		(3)	%

Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred related to our receivables were immaterial during the third quarter of ~~2022.~~2023.

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

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately ~~$7.2~~$11.6 million of the December 31, ~~2021~~2022 unearned amounts as revenue during the first nine months of ~~2022.~~2023.

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

Note D — Restructuring

Over the first nine months of 2023, the Company implemented various restructuring initiatives across the Performance Materials, Electronic Materials and Precision Optics segments to improve operational efficiency. This resulted in severance and related costs of approximately $1.1 million and $3.2 million during the three months and nine months ended September 29, 2023, respectively. Approximately $1.9 million of those severance costs were paid as of September 29, 2023.

In the first nine months of 2022, the Company recorded a combined total of $1.6 million of restructuring charges in our Precision Optics, Electronic Materials and Other segments as a result of cost reduction actions taken in order to reduce our fixed cost structure.

Note E — Other-net

Other-net for the third quarter and first nine months of ~~2022~~2023 and ~~2021~~2022 is summarized as follows:


		Third Quarter Ended				Nine Months Ended					Third Quarter Ended				Nine Months Ended
		September 30,		October 1,		September 30,		October 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2022		2021		2022		2021		(Thousands)	2023		2022		2023		2022
Amortization of intangible assets	Amortization of intangible assets	$	3,088	$	1,283	$	9,318	$	3,461	Amortization of intangible assets	$	3,153	$	3,088	$	9,403	$	9,318
Metal consignment fees	Metal consignment fees	3,111		2,243		8,993		6,857		Metal consignment fees	2,580		3,111		8,307		8,993
Foreign currency (gain) loss	Foreign currency (gain) loss	235		380		(70)		1,596		Foreign currency (gain) loss	609		235		571		(70)
Net loss (gain) on disposal of fixed assets		(1)		81		17		(283)
Other items	Other items	341		(383)		317		641		Other items	(131)		340		(103)		334
Total	Total	$	6,774	$	3,604	$	18,575	$	12,272	Total	$	6,211	$	6,774	$	18,178	$	18,575

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note F — Income Taxes

The Company's effective tax rate for the third quarter of 2023 and 2022 was 10.0% and ~~2021 was~~ 18.2% ~~and 15.9%~~, respectively, and ~~18.0%~~13.5% and ~~16.1%~~18.0% in the first nine months of ~~2022~~2023 and ~~2021,~~2022, respectively. The effective tax rate for ~~each period in~~2023 was lower than the statutory tax rate primarily due to the impact of the foreign derived intangible income deduction, percentage depletion, research and development and production credits. The effective tax rate for 2022 ~~and 2021~~ was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits and the ~~foreign derived~~foreign-derived intangible income deduction. The effective tax rate for the first nine months of ~~2022~~2023 included a net discrete income tax benefit of $3.4 million, primarily related to an optimization of our foreign-derived intangible income deduction benefit, excess tax benefits from stock-based compensation awards and ~~2021~~return to provision adjustments . The effective tax rate for the first nine months of 2022 included a net discrete income tax benefit of $0.9 million, ~~for each period,~~ primarily related to excess tax benefits from stock-based compensation awards and return to provision ~~adjustments recorded.~~adjustments.

Government Tax Credits

On August 9, 2022, President Biden signed the CHIPS and Science Act (the CHIPS Act) into law. The CHIPS Act provides incentives, beginning in 2023, for manufacturing semiconductors and certain tooling equipment used in the semiconductor manufacturing process. On August 16, 2022, President Biden ~~also~~ signed the Inflation Reduction Act of 2022 (IRA) into law. The IRA, among other provisions, includes a new corporate alternative minimum tax on certain large corporations and new or enhanced federal energy and manufacturing tax credits effective for tax years beginning in 2023. The Company is not subject to the minimum tax as our average annual book profits over the prior three-year period were less than $1 billion. The IRA introduced a new advanced manufacturing production credit (production credit), which provides an ~~excise~~annual cash benefit for a portion of production costs for the sale of certain minerals produced in the U.S. and sold by a taxpayer during the year.

The IRA affords the Company eligibility to a production credit beginning in 2023, for which the Company expects to recognize cash savings of approximately $10 million for the year ending December 31, 2023. The issuance of guidance and interpretation as to the eligibility for, calculation of, and methods for claiming the production credit remain pending. We will continue to monitor developments related to the production credit from the Internal Revenue Service and U.S. Treasury Department and evaluate the potential impact to the Company’s production credit. The Company will finalize the expected annual production credit impact as further guidance is issued.

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

1513

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

tax on stock buybacks, and tax credits for certain critical minerals. The Company does not expect to be an applicable corporation subject to the alternative minimum tax based on our reported GAAP earnings the past three years. The Company does not expect the CHIPS Act or the IRA to have a material impact to our consolidated financial statements for the year ending December 31, 2022. We continue to examine the impacts the CHIPS Act and the IRA may have on the Company in 2023 and subsequent years.

Note G — Earnings Per Share (EPS)

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


		Third Quarter Ended				Nine Months Ended					Third Quarter Ended				Nine Months Ended
		September 30,		October 1,		September 30,		October 1,			September 29,		September 30,		September 29,		September 30,
(Thousands, except per share amounts)	(Thousands, except per share amounts)	2022		2021		2022		2021		(Thousands, except per share amounts)	2023		2022		2023		2022
Numerator for basic and diluted EPS:	Numerator for basic and diluted EPS:									Numerator for basic and diluted EPS:
Net income	Net income	$	19,952	$	18,156	$	57,226	$	52,791	Net income	$	26,564	$	19,952	$	76,234	$	57,226
Denominator:	Denominator:									Denominator:
Denominator for basic EPS:	Denominator for basic EPS:									Denominator for basic EPS:
Weighted-average shares outstanding	Weighted-average shares outstanding	20,526		20,439		20,502		20,414		Weighted-average shares outstanding	20,640		20,526		20,611		20,502
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Stock appreciation rights	Stock appreciation rights	85		72		85		73		Stock appreciation rights	79		85		87		85
Restricted stock units	Restricted stock units	98		94		113		113		Restricted stock units	84		98		89		113
Performance-based restricted stock units	Performance-based restricted stock units	71		52		55		59		Performance-based restricted stock units	102		71		104		55
Diluted potential common shares	Diluted potential common shares	254		218		254		245		Diluted potential common shares	265		254		280		254
Denominator for diluted EPS:	Denominator for diluted EPS:									Denominator for diluted EPS:
Adjusted weighted-average shares outstanding	Adjusted weighted-average shares outstanding	20,780		20,657		20,756		20,659		Adjusted weighted-average shares outstanding	20,905		20,780		20,891		20,756
Basic EPS	Basic EPS	$	0.97	$	0.89	$	2.79	$	2.59	Basic EPS	$	1.29	$	0.97	$	3.70	$	2.79
Diluted EPS	Diluted EPS	$	0.96	$	0.88	$	2.76	$	2.56	Diluted EPS	$	1.27	$	0.96	$	3.65	$	2.76

Adjusted weighted-average shares outstanding - diluted exclude securities totaling ~~45,016~~47,250 and ~~55,598~~45,016 for the quarters ended September 29, 2023 and September 30, 2022, ~~and October 1, 2021,~~ respectively, and ~~54,680~~36,927 and ~~56,319~~54,680 for the nine months ended September 29, 2023 and September 30, 2022, ~~and October 1, 2021,~~ respectively. These securities are primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices greater than the average market price of the Company's common shares and were excluded from the dilution calculation as the effect would have been anti-dilutive.

Note H — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:


		September 30,		December 31,			September 29,		December 31,
(Thousands)	(Thousands)	2022		2021		(Thousands)	2023		2022
Raw materials and supplies	Raw materials and supplies	$	114,225	$	93,518	Raw materials and supplies	$	109,731	$	113,694
Work in process	Work in process	252,077		221,638		Work in process	269,508		249,105
Finished goods	Finished goods	53,997		45,959		Finished goods	72,803		60,281
Inventories, net	Inventories, net	$	420,299	$	361,115	Inventories, net	$	452,042	$	423,080

The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce its exposure to metal market price movements and to reduce its working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$354.2~~$344.8 million and ~~$480.2~~$373.1 million as of September ~~30, 2022~~29, 2023 and December 31, ~~2021,~~2022, respectively.

1614

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note I — Customer Prepayments

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

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

Additionally, during the second quarter of 2022, the Company entered into an amendment to the investment agreement with the same customer to procure additional equipment to manufacture product for the customer. ~~As of September 30, 2022,~~During 2023, the Company has received approximately ~~$17.5~~$16.7 million in prepayments under the terms of this amended agreement.

As of September ~~30, 2022~~29, 2023 and December 31, ~~2021, $88.2~~2022, $90.0 million and ~~$72.6~~$85.9 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheets. The prepayments will remain in Unearned income until commercial purchase orders are received for product serviced out of the equipment, at which time a portion of the purchase order value related to prepayments will be reclassified to Unearned revenue. As of September ~~30, 2022 $1.0~~29, 2023 $5.8 million of the prepayments are classified as Unearned revenue.

Note J — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the third quarter and first nine months ended September 29, 2023 and September 30, 2022, ~~and October 1, 2021,~~ respectively, for the pension plans as shown below. The Pension Benefits column aggregates defined benefit pension plans in the U.S., Germany, Liechtenstein, England, and the U.S. supplemental retirement plans. The Other Benefits column includes the domestic retiree medical and life insurance plan.


		Pension Benefits				Other Benefits					Pension Benefits				Other Benefits
		Third Quarter Ended				Third Quarter Ended					Third Quarter Ended				Third Quarter Ended
		September 30,		October 1,		September 30,		October 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2022		2021		2022		2021		(Thousands)	2023		2022		2023		2022
Components of net periodic benefit (credit) cost	Components of net periodic benefit (credit) cost									Components of net periodic benefit (credit) cost
Service cost	Service cost	$	281	$	410	$	21	$	20	Service cost	$	209	$	281	$	13	$	21
Interest cost	Interest cost	1,203		1,045		39		29		Interest cost	1,966		1,203		68		39
Expected return on plan assets	Expected return on plan assets	(2,380)		(2,459)		—		—		Expected return on plan assets	(2,421)		(2,380)		—		—
Amortization of prior service (benefit) cost	Amortization of prior service (benefit) cost	(19)		(18)		(374)		(374)		Amortization of prior service (benefit) cost	(21)		(19)		(139)		(374)
Amortization of net loss (gain)	Amortization of net loss (gain)	410		565		(68)		(69)		Amortization of net loss (gain)	(75)		410		(95)		(68)
Net periodic benefit (credit) cost	Net periodic benefit (credit) cost	$	(505)	$	(457)	$	(382)	$	(394)	Net periodic benefit (credit) cost	$	(342)	$	(505)	$	(153)	$	(382)
Settlements		—		—		—		—
Total net benefit (credit) cost		$	(505)	$	(457)	$	(382)	$	(394)


	Pension Benefits				Other Benefits
	Nine Months Ended				Nine Months Ended
	September 29,		September 30,		September 29,		September 30,
(Thousands)	2023		2022		2023		2022
Components of net periodic benefit (credit) cost
Service cost	$	642	$	891	$	38	$	63
Interest cost	5,909		3,639		205		117
Expected return on plan assets	(7,282)		(7,158)		—		—
Amortization of prior service (benefit) cost	(65)		(57)		(417)		(1,122)
Amortization of net loss (gain)	(231)		1,260		(285)		(204)
Net periodic benefit (credit) cost	$	(1,027)	$	(1,425)	$	(459)	$	(1,146)

1715

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Pension Benefits Other Benefits
Nine Months Ended Nine Months Ended
September 30, October 1, September 30, October 1,
(Thousands) 2022 2021 2022 2021
Components of net periodic benefit (credit) cost
Service cost $ 891 $ 1,284 $ 63 $ 60
Interest cost 3,639 3,141 117 87
Expected return on plan assets (7,158) (7,407) — —
Amortization of prior service (benefit) cost (57) (60) (1,122) (1,122)
Amortization of net loss (gain) 1,260 1,719 (204) (207)
Net periodic benefit (credit) cost $ (1,425) $ (1,323) $ (1,146) $ (1,182)
Settlements — — — —
Total net benefit (credit) cost $ (1,425) $ (1,323) $ (1,146) $ (1,182)

The Company did not make any contributions to its domestic defined benefit plan in the third quarter or first nine months of ~~2022~~2023 or ~~2021.~~2022.

The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in Other non-operating (income) expense.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note K — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the third quarter and first nine months of ~~2022~~2023 and ~~2021~~2022 are as follows:


		Gains and Losses on Cash Flow Hedges																	Gains and Losses on Cash Flow Hedges
(Thousands)	(Thousands)	Foreign Currency		Interest Rate		Precious Metals		Copper		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total		(Thousands)	Foreign Currency		Interest Rate		Precious Metals		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total
Balance at July 1, 2022		$	3,226	$	3,250	$	108	$	—	$	6,584	$	(39,926)	$	(11,277)	$	(44,619)
Balance at June 30, 2023																		Balance at June 30, 2023	$	1,290	$	7,069	$	(443)	$	7,916	$	(40,549)	$	(6,810)	$	(39,443)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	837		4,360		441		—		5,638		—		(6,094)		(456)		Other comprehensive income (loss) before reclassifications	766		2,398		515		3,679		—		(3,259)		420
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(41)		(115)		(126)		—		(282)		(18)		—		(300)		Amounts reclassified from accumulated other comprehensive income (loss)	—		(1,140)		83		(1,057)		(299)		—		(1,356)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	796		4,245		315		—		5,356		(18)		(6,094)		(756)		Net current period other comprehensive (loss) income before tax	766		1,258		598		2,622		(299)		(3,259)		(936)
Deferred taxes	Deferred taxes	183		976		72		—		1,231		(26)		—		1,205		Deferred taxes	176		289		138		603		(154)		—		449
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	613		3,269		243		—		4,125		8		(6,094)		(1,961)		Net current period other comprehensive (loss) income after tax	590		969		460		2,019		(145)		(3,259)		(1,385)
Balance at September 30, 2022		$	3,839	$	6,519	$	351	$	—	$	10,709	$	(39,918)	$	(17,371)	$	(46,580)
Balance at September 29, 2023																		Balance at September 29, 2023	$	1,880	$	8,038	$	17	$	9,935	$	(40,694)	$	(10,069)	$	(40,828)

Balance at July 2, 2021		$	1,603	$	—	$	186	$	—	$	1,789	$	(43,226)	$	(1,647)	$	(43,084)
Balance at July 1, 2022																		Balance at July 1, 2022	$	3,226	$	3,250	$	108	$	6,584	$	(39,926)	$	(11,277)	$	(44,619)
Other comprehensive (loss) income before reclassifications	Other comprehensive (loss) income before reclassifications	625		—		30		8		663		—		(2,029)		(1,366)		Other comprehensive (loss) income before reclassifications	837		4,360		441		$	5,638	—		(6,094)		(456)
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(2)		—		(83)		(8)		(93)		114		—		21		Amounts reclassified from accumulated other comprehensive income (loss)	(41)		(115)		(126)		$	(282)	(18)		—		(300)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	623		—		(53)		—		570		114		(2,029)		(1,345)		Net current period other comprehensive (loss) income before tax	796		4,245		315		5,356		(18)		(6,094)		(756)
Deferred taxes	Deferred taxes	143				(12)		—		131		(7)		—		124		Deferred taxes	183		976		72		1,231		(26)		—		1,205
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	480		—		(41)		—		439		121		(2,029)		(1,469)		Net current period other comprehensive (loss) income after tax	613		3,269		243		4,125		8		(6,094)		(1,961)
Balance at October 1, 2021		$	2,083	$	—	$	145	$	—	$	2,228	$	(43,105)	$	(3,676)	$	(44,553)
Balance at September 30, 2022																		Balance at September 30, 2022	$	3,839	$	6,519	$	351	$	10,709	$	(39,918)	$	(17,371)	$	(46,580)

1916

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


		Gains and Losses on Cash Flow Hedges																	Gains and Losses on Cash Flow Hedges
(Thousands)	(Thousands)	Foreign Currency		Interest Rate		Precious Metals		Copper		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total		(Thousands)	Foreign Currency		Interest Rate		Precious Metals		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total
Balance at December 31, 2021		$	2,348	$	—	$	72	$	—	$	2,420	$	(39,702)	$	(2,887)	$	(40,169)
Balance at December 31, 2022																		Balance at December 31, 2022	$	1,243	$	6,055	$	(223)	$	7,075	$	(40,228)	$	(8,756)	$	(41,909)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	2,107		8,228		388		—		10,723		—		(14,484)		(3,761)		Other comprehensive income (loss) before reclassifications	862		5,525		119		6,506		—		(1,313)		5,193
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(170)		238		(27)		—		41		(1,028)		—		(987)		Amounts reclassified from accumulated other comprehensive income (loss)	(35)		(2,950)		193		(2,792)		(844)		—		(3,636)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	1,937		8,466		361		—		10,764		(1,028)		(14,484)		(4,748)		Net current period other comprehensive (loss) income before tax	827		2,575		312		3,714		(844)		(1,313)		1,557
Deferred taxes	Deferred taxes	446		1,947		82		—		2,475		(812)		—		1,663		Deferred taxes	190		592		72		854		(378)		—		476
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	1,491		6,519		279		—		8,289		(216)		(14,484)		(6,411)		Net current period other comprehensive (loss) income after tax	637		1,983		240		2,860		(466)		(1,313)		1,081
Balance at September 30, 2022		$	3,839	$	6,519	$	351	$	—	$	10,709	$	(39,918)	$	(17,371)	$	(46,580)
Balance at September 29, 2023																		Balance at September 29, 2023	$	1,880	$	8,038	$	17	$	9,935	$	(40,694)	$	(10,069)	$	(40,828)

Balance at December 31, 2020		$	519	$	—	$	(170)	$	468	$	817	$	(43,473)	$	4,017	$	(38,639)
Balance at December 31, 2021																		Balance at December 31, 2021	$	2,348	$	—	$	72	$	2,420	$	(39,702)	$	(2,887)	$	(40,169)
Other comprehensive (loss) income before reclassifications	Other comprehensive (loss) income before reclassifications	1,893		—		532		2,444		4,869		—		(7,693)		(2,824)		Other comprehensive (loss) income before reclassifications	2,107		8,228		388		10,723		—		(14,484)		(3,761)
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	138		—		(122)		(3,049)		(3,033)		348		—		(2,685)		Amounts reclassified from accumulated other comprehensive income (loss)	(170)		238		(27)		41		(1,028)		—		(987)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	2,031		—		410		(605)		1,836		348		(7,693)		(5,509)		Net current period other comprehensive (loss) income before tax	1,937		8,466		361		10,764		(1,028)		(14,484)		(4,748)
Deferred taxes	Deferred taxes	467		—		95		(137)		425		(20)		—		405		Deferred taxes	446		1,947		82		2,475		(812)		—		1,663
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	1,564		—		315		(468)		1,411		368		(7,693)		(5,914)		Net current period other comprehensive (loss) income after tax	1,491		6,519		279		8,289		(216)		(14,484)		(6,411)
Balance at October 1, 2021		$	2,083	$	—	$	145	$	—	$	2,228	$	(43,105)	$	(3,676)	$	(44,553)
Balance at September 30, 2022																		Balance at September 30, 2022	$	3,839	$	6,519	$	351	$	10,709	$	(39,918)	$	(17,371)	$	(46,580)

Reclassifications from accumulated other comprehensive income (loss) 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 (loss) of gains and losses on precious metal and copper cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Reclassifications from accumulated other comprehensive income (loss) of gains and losses on the interest rate cash flow hedge is recorded in Interest expense in the Consolidated Statements of Income. Refer to Note N for additional details on cash flow hedges.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

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

2117

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note L — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was ~~$2.2~~$2.6 million and ~~$6.0~~$7.8 million in the third quarter and first nine months of ~~2022,~~2023, respectively, compared to ~~$1.5~~$2.2 million and ~~$5.3~~$6.0 million, respectively, in the same periods of ~~2021.~~2022.

The Company granted ~~45,016~~47,084 stock appreciation rights (SARs) to certain employees during the first nine months of ~~2022.~~2023. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the nine months ended September ~~30, 2022~~29, 2023 were ~~$80.85~~$113.28 and ~~$25.87,~~$42.27, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:


Risk-free interest rate	~~1.56~~4.27	%
Dividend yield	~~0.59~~0.44	%
Volatility	~~38.5~~39.0	%
Expected term (in years)	~~4.4~~4.5

The Company granted ~~61,145~~54,788 stock-settled restricted stock units (RSUs) to certain employees during the first nine months of ~~2022.~~2023. The Company measures the fair value of stock-settled RSUs based on the closing market price of a share of Materion common stock on the date of the grant. The weighted-average fair value per share was ~~$80.88~~$112.53 for stock-settled RSUs granted to employees during the nine months ended September ~~2022.~~29, 2023. RSUs are generally expensed over the vesting period of three years for employees.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first nine months of ~~2022.~~2023. The weighted-average fair value of the stock-settled PRSUs was ~~$97.79~~$154.97 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 its total return to shareholders over the vesting period relative to a peer group’s performance over the same period.

At September ~~30, 2022,~~29, 2023, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately ~~$13.0~~$17.0 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note M — Fair Value of Financial Instruments

The Company measures and records financial instruments at fair value. A 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.

2218

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of September ~~30, 2022~~29, 2023 and December 31, ~~2021:~~2022:



(Thousands)	(Thousands)	Total Carrying Value in the Consolidated Balance Sheets				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				(Thousands)	Total Carrying Value in the Consolidated Balance Sheets				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		2022		2021		2022		2021		2022		2021		2022		2021			2023		2022		2023		2022		2023		2022		2023		2022
Financial Assets	Financial Assets																	Financial Assets
Deferred compensation investments	Deferred compensation investments	$	2,754	$	4,426	$	2,754	$	4,426	$	—	$	—	$	—	$	—	Deferred compensation investments	$	4,521	$	3,001	$	4,521	$	3,001	$	—	$	—	$	—	$	—
Foreign currency forward contracts	Foreign currency forward contracts	3,796		3,368		—		—		3,796		3,368		—		—		Foreign currency forward contracts	1,643		1,291		—		—		1,643		1,291		—		—
Interest rate swap	Interest rate swap	8,467		—		—		—		8,467		—		—		—		Interest rate swap	10,438		7,863		—		—		10,438		7,863		—		—
Precious metal swaps	Precious metal swaps	476		116		—		—		476		116		—		—		Precious metal swaps	94		118		—		—		94		118		—		—
Total	Total	$	15,493	$	7,910	$	2,754	$	4,426	$	12,739	$	3,484	$	—	$	—	Total	$	16,696	$	12,273	$	4,521	$	3,001	$	12,175	$	9,272	$	—	$	—
Financial Liabilities	Financial Liabilities																	Financial Liabilities
Deferred compensation liability	Deferred compensation liability	$	2,754	$	4,426	$	2,754	$	4,426	$	—	$	—	$	—	$	—	Deferred compensation liability	$	4,521	$	3,001	$	4,521	$	3,001	$	—	$	—	$	—	$	—
Foreign currency forward contracts	Foreign currency forward contracts	736		136		—		—		736		136		—		—		Foreign currency forward contracts	776		1,757		—		—		776		1,757		—		—
Interest Rate Swap																		Interest Rate Swap	—		—				—		—		—				—
Precious metal swaps	Precious metal swaps	23		24		—		—		23		24		—		—		Precious metal swaps	75		411		—		—		75		411		—		—
Total	Total	$	3,513	$	4,586	$	2,754	$	4,426	$	759	$	160	$	—	$	—	Total	$	5,372	$	5,169	$	4,521	$	3,001	$	851	$	2,168	$	—	$	—

The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies, metals, and interest rates. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of September ~~30, 2022~~29, 2023 and December 31, ~~2021.~~2022. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.

Note N — Derivative Instruments and Hedging Activity

The Company uses derivative contracts to hedge exposure to movements in interest rates associated with borrowings, foreign currency exposures, and precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows:

Interest Rate. On March 4, 2022, the Company entered into a $100.0 million interest rate swap to hedge the interest rate risk on the Credit Agreement described in Note P. The swap hedges the change in 1-month LIBOR from March 4, 2022 to November 2, 2026. On March 21, 2023, the Company entered into two $50.0 million interest rate swaps to hedge the interest rate risk on the Credit Agreement described in Note P. The swaps hedge the change in 1-month USD-SOFR. The purpose of this hedge is to manage the risk of changes in the monthly interest payments attributable to changes in the benchmark interest rate.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar.

The use of forward contracts locks in a firm rate and eliminates any downside 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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

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

The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and nature of instruments to use to hedge 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. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements.

Precious Metals. The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a product containing precious metal is fabricated and delivered to the customer, the metal content is purchased out of consignment based on the current market price. The price paid by the Company for the precious metal forms the basis for the price charged to the customer for the metal content in the product. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by ~~financial institutions~~precious metal consignors that charge the Company consignment fees based upon the value of the metal as it fluctuates while on consignment. Each ~~financial institution~~precious metal consignor retains title to its consigned precious metal until it is purchased by the Company, and it is the Company’s typical practice to purchase metal out of consignment only after a product containing that metal has been purchased by one of our customers.

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

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

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency 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 a 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) and reclassified into income in the same period or periods during which the hedged transaction affects 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 derivative assets and liabilities are classified as short-term or long-term depending upon the contract maturity date.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and the balance sheet classification as of September ~~30, 2022~~29, 2023 and December 31, ~~2021:~~2022:


		September 30, 2022				December 31, 2021					September 29, 2023				December 31, 2022
(Thousands)	(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value		(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Foreign currency forward contracts	Foreign currency forward contracts									Foreign currency forward contracts
Prepaid and other current assets	Prepaid and other current assets	$	14,216	$	619	$	55,063	$	2,132	Prepaid and other current assets	$	25,255	$	924	$	12,242	$	791
Other liabilities and accrued items	Other liabilities and accrued items	16,144		722		9,425		128		Other liabilities and accrued items	16,142		675		17,061		1,048

These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included less than $0.1 million of foreign currency losses in the third quarter ~~of 2022~~ and ~~$0.7~~$0.4 million of foreign currency ~~gains~~losses related to derivatives in the first nine months of ~~2022,~~2023, compared to ~~$0.4~~less than $0.1 million of foreign currency losses and ~~$2.7~~$0.7 million of foreign currency gains in the third quarter and first nine months of ~~2021,~~2022, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of September ~~30, 2022~~29, 2023 and December 31, ~~2021:~~2022:


		September 30, 2022											September 29, 2023
				Fair Value											Fair Value
(Thousands)	(Thousands)	Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities		(Thousands)	Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities
Foreign currency forward contracts - yen	Foreign currency forward contracts - yen	$	3,301	$	460	$	35	$	14	$	—	Foreign currency forward contracts - yen	$	1,873	$	156	$	6	$	—	$	—
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	27,030		2,494		188		—		—		Foreign currency forward contracts - euro	19,366		516		41		101		—
Precious metal swaps	Precious metal swaps	5,227		476		—		9		14		Precious metal swaps	4,049		84		10		75		—
Interest rate swap	Interest rate swap	100,000		2,798		5,669		—		—		Interest rate swap	200,000		5,047		5,391		—		—
Total	Total	$	135,558	$	6,228	$	5,892	$	23	$	14	Total	$	225,288	$	5,803	$	5,448	$	176	$	—

		December 31, 2021											December 31, 2022
				Fair Value											Fair Value
		Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities			Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities

Foreign currency forward contracts - yen	Foreign currency forward contracts - yen	$	3,907	$	131	$	2	$	—	$	—	Foreign currency forward contracts - yen	$	2,985	$	145	$	—	$	74	$	26
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	28,412		1,102		—		—		8		Foreign currency forward contracts - euro	25,712		355		—		472		137
Precious metal swaps	Precious metal swaps	6,256		116		—		24		—		Precious metal swaps	8,758		118		—		411		—
Interest rate swap												Interest rate swap	100,000		3,114		4,749		—		—
Total	Total	$	38,575	$	1,349	$	2	$	24	$	8	Total	$	137,455	$	3,732	$	4,749	$	957	$	163

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

All of the contracts summarized above were designated and effective as cash flow hedges. We expect to reclassify ~~$6.2~~$5.6 million of net gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. At September ~~30, 2022,~~29, 2023, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years. Refer to Note K for further details related to OCI.

The following table summarizes the amounts reclassified from accumulated other comprehensive income relating to the Company’s outstanding derivatives designated as cash flow hedges and associated income statement classification as of the third quarter and first nine months of ~~2022~~2023 and ~~2021:~~2022:


			Third Quarter Ended						Third Quarter Ended
(Thousands)	(Thousands)		September 30, 2022		October 1, 2021		(Thousands)		September 29, 2023		September 30, 2022
Hedging relationship	Hedging relationship	Line item					Hedging relationship	Line item
Foreign currency forward contracts	Foreign currency forward contracts	Net sales	$	(41)	$	(2)	Foreign currency forward contracts	Net sales	$	—	$	(41)
Precious metal swaps	Precious metal swaps	Cost of sales	(126)		(83)		Precious metal swaps	Cost of sales	83		(126)
Interest rate swap	Interest rate swap	Interest expense - net	(115)		—		Interest rate swap	Interest expense - net	(1,140)		(115)
Copper swaps		Cost of sales	—		(8)
Total	Total		$	(282)	$	(93)	Total		$	(1,057)	$	(282)

Nine Months Ended
(Thousands) September 30, 2022 October 1, 2021
Hedging relationship Line item
Foreign currency forward contracts Net sales $ (171) $ 138
Precious metal swaps Cost of sales (27) (122)
Interest rate swap Interest expense - net 238 —
Copper swaps Cost of sales — (3,049)
Total $ 40 $ (3,033)

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


		Nine Months Ended
(Thousands)		September 29, 2023		September 30, 2022
Hedging relationship	Line item
Foreign currency forward contracts	Net sales	$	(35)	$	(171)
Precious metal swaps	Cost of sales	193		(27)
Interest rate swap	Interest expense - net	(2,950)		238
Total		$	(2,792)	$	40

Note O — Contingencies

Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note TS "Contingencies and Commitments" in the Company's ~~2021~~2022 Annual Report on Form 10-K.

There were no pending beryllium cases as of September 29, 2023. One beryllium case that was ~~outstanding as~~settled in the second quarter of ~~September 30, 2022. The Company does not expect~~2023 was dismissed with prejudice during the ~~resolution~~third quarter of ~~this open matter to have a material impact on the consolidated financial statements.~~2023 after receiving court approval.

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.

On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. Plaintiff filed a motion for conditional certification, which the Company opposed. On August 2, 2022, the Court conditionally certified a class of employees at the Company’s Elmore facility only and rejected certification of a class across the Company’s other facilities. In November 2022, the parties reached a settlement for an immaterial amount. The ~~Company believes that it has substantive defenses~~Court preliminarily approved the settlement on March 30, 2023 and ~~intends~~a final approval hearing was held on July 6, 2023. There were no objections to ~~vigorously defend this suit, absent a negotiated resolution.~~

the settlement and the Court entered an order approving the final settlement on July 7, 2023, and the settlement amount was subsequently paid out prior to the end of the third quarter.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

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 ~~$4.3~~$4.4 million and ~~$4.8~~$4.5 million at September ~~30, 2022~~29, 2023 and December 31, ~~2021,~~2022, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note P — Debt


(Thousands)	(Thousands)	September 30, 2022		December 31, 2021		(Thousands)	September 29, 2023		December 31, 2022
Borrowings under Credit Agreement	Borrowings under Credit Agreement	$	201,388	$	152,296	Borrowings under Credit Agreement	$	176,750	$	143,250
Borrowings under the Term Loan Facility	Borrowings under the Term Loan Facility	288,750		300,000		Borrowings under the Term Loan Facility	273,750		285,000
Overdraft Sweep Facility						Overdraft Sweep Facility	6,848		—
Foreign debt	Foreign debt	7,947		2,252		Foreign debt	6,714		7,541
Total debt outstanding	Total debt outstanding	498,085		454,548		Total debt outstanding	464,062		435,791
Current portion of long-term debt	Current portion of long-term debt	(19,747)		(15,359)		Current portion of long-term debt	(38,634)		(21,105)
Gross long-term debt	Gross long-term debt	478,338		439,189		Gross long-term debt	425,428		414,686
Unamortized deferred financing fees	Unamortized deferred financing fees	(4,058)		(4,801)		Unamortized deferred financing fees	(3,067)		(3,810)
Long-term debt	Long-term debt	$	474,280	$	434,388	Long-term debt	$	422,361	$	410,876

As of September ~~30, 2022~~29, 2023 and December 31, ~~2021,~~2022, the Company had ~~$201.4~~$176.8 million outstanding at an average interest rate of ~~4.74%~~6.92% and ~~$152.3~~$143.3 million outstanding at an average interest rate of ~~2.12%~~6.08%, respectively, under its revolving credit facility. The available borrowing capacity under the revolving credit facility as of September ~~30, 2022~~29, 2023 was ~~$127.2~~$151.0 million. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2026. The amended and restated credit agreement governing the revolving credit facility (Credit Agreement) includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of September ~~30, 2022.~~29, 2023.

The balance outstanding on the term loan facility as of September ~~30, 2022~~29, 2023 and December 31, ~~2021 was $288.8~~2022 was $273.8 million and ~~$300.0~~$285.0 million, respectively.

At September ~~30, 2022~~29, 2023 and December 31, ~~2021,~~2022, there was ~~$46.4~~$47.3 million and ~~$46.3~~$46.5 million, respectively, outstanding against the letters of credit sub-facility.


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 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) Third Quarter 2022 Update~~

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

2824

RESULTS OF OPERATIONS

Third Quarter


		Third Quarter Ended										Third Quarter Ended
		September 30,			October 1,			$		%				September 29,			September 30,			$		%
(Thousands, except per share data)	(Thousands, except per share data)	2022			2021			Change		Change			(Thousands, except per share data)	2023			2022			Change		Change
Net sales	Net sales	$	428,191		$	388,028		$	40,163	10	%		Net sales	$	403,067		$	428,191		$	(25,124)	(6)	%
Value-added sales	Value-added sales	290,426			215,826			74,600		35	%		Value-added sales	270,532			283,497			(12,965)		(5)	%
Gross margin	Gross margin	82,743			74,313			8,430		11	%		Gross margin	88,936			82,743			6,193		7	%
Gross margin as a % of value-added sales	Gross margin as a % of value-added sales	28		%	34		%						Gross margin as a % of value-added sales	33		%	29		%
Selling, general, and administrative (SG&A) expense	Selling, general, and administrative (SG&A) expense	38,958			43,195			(4,237)		(10)	%		Selling, general, and administrative (SG&A) expense	38,806			38,958			(152)		—	%
SG&A expense as a % of value-added sales	SG&A expense as a % of value-added sales	13		%	20		%						SG&A expense as a % of value-added sales	14		%	14		%
Research and development (R&D) expense	Research and development (R&D) expense	7,430			6,354			1,076		17	%		Research and development (R&D) expense	6,322			7,430			(1,108)		(15)	%
R&D expense as a % of value-added sales	R&D expense as a % of value-added sales	3		%	3		%						R&D expense as a % of value-added sales	2		%	3		%
Restructuring expense	Restructuring expense	484			—			484		—	%		Restructuring expense	1,077			484			593		123	%
Other—net	Other—net	6,774			3,604			3,170		88	%		Other—net	6,211			6,774			(563)		(8)	%
Operating profit	Operating profit	29,097			21,160			7,937		38	%		Operating profit	36,520			29,097			7,423		26	%
Other non-operating (income)—net	Other non-operating (income)—net	(1,175)			(1,279)			104		(8)	%		Other non-operating (income)—net	(685)			(1,175)			490		(42)	%
Interest expense—net	Interest expense—net	5,888			861			5,027		584	%		Interest expense—net	7,678			5,888			1,790		30	%
Income before income taxes	Income before income taxes	24,384			21,578			2,806		13	%		Income before income taxes	29,527			24,384			5,143		21	%
Income tax expense	Income tax expense	4,432			3,422			1,010		30	%		Income tax expense	2,963			4,432			(1,469)		(33)	%
Net income	Net income	$	19,952		$	18,156		$	1,796	10	%		Net income	$	26,564		$	19,952		$	6,612	33	%

Diluted earnings per share	Diluted earnings per share	$	0.96		$	0.88		$	0.08	9	%		Diluted earnings per share	$	1.27		$	0.96		$	0.31	32	%

Net sales of $403.1 million in the third quarter of 2023 decreased $25.1 million from $428.2 million in the third quarter of ~~2022 increased $40.2 million from $388.0 million~~2022. A decrease in net sales in the ~~third quarter of 2021. Increased~~Electronic Materials and Precision Optics segments were partially offset by increased net sales in the Performance Materials segment. Volume decreases in the semiconductor (18%), industrial (19%), automotive (18%) and ~~Electronic Materials segments~~medical (37%) end markets were partially offset by ~~a net sales decrease in~~an increase the ~~Precision Optics segment. Volume and price increases drove growth in our industrial (23%), semiconductor (6%),~~ aerospace and defense ~~(25%) and energy~~ (19%) end ~~markets when compared to~~market, as well as incremental sales from the ~~same period last year. The acquisition~~clad strip project of ~~HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $49.2 million of the net sales increase, most of which are sales into the semiconductor end market.~~$28.2 million. See Note CB to the Consolidated Financial Statements for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper prices ~~unfavorably~~favorably impacted net sales by ~~$10.2~~$3.1 million during the third quarter of ~~2022~~2023 compared to prior ~~year. Additionally, net sales were unfavorably impacted by foreign currency headwinds~~year quarter.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in precious metal market prices and changes in mix due to customer-supplied material. Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein. Value-added sales of ~~$290.4~~$270.5 million in the third quarter of ~~2022 increased $74.6~~2023 decreased $13.0 million, or ~~35%~~5%, compared to the third quarter of ~~2021. The acquisition of HCS-Electronic Materials, which was completed~~2022. Volume decreases in the fourth quarter of 2021, accounted for $49.2 million of the increase. The remaining value-added sales increase was driven by increased value-added sales into the industrial (10%), energy (27%), aerospace and defense (10%semiconductor (33%) and ~~semiconductor (7%~~industrial (19%) end ~~markets. These increases~~markets were partially offset by ~~foreign currency headwinds.~~an increase in the aerospace and defense end market (27%) and incremental sales from the clad strip project of $28.2 million.

Gross margin in the third quarter of ~~2022~~2023 was ~~$82.7~~$88.9 million, which was up ~~11%~~7% compared to the third quarter of ~~2021.~~2022. Gross margin expressed as a percentage of value-added sales ~~decreased~~increased to ~~28%~~33% in the third quarter of ~~2022~~2023 from ~~34%~~29% in the third quarter of ~~2021.~~2022. The ~~favorable impacts~~production tax credit recorded in the third quarter of ~~volume and pricing were offset by~~2023 favorably impacted gross margin. See Note F to the unfavorable impacts of product mix, higher pre-production costs associated with the production ramp of the new wide area clad facility and delayed Precision Optics recovery, resulting in an overall decrease in margin.Consolidated Financial Statements for further discussion.

SG&A expense was $38.8 million in the third quarter of 2023, compared to $39.0 million in the third quarter of ~~2022, compared to $43.2 million in the third quarter of 2021. The decrease in~~2022. SG&A expense ~~is due to decreased variable compensation expense in 2022 as well as higher legal~~remained relatively flat and ~~due~~

~~diligence related cost in the prior year due to the HCS-Electronic Materials acquisition. SG&A expense~~expressed as a percentage of value-added sales ~~decreased from 20% to 13% year over year.~~was 14% for both the third quarter of 2023 and 2022.

customers. R&D expense ~~accounted for 3%~~as a percent of value-added sales decreased slightly from 3% in the third quarter of ~~both~~ 2022 ~~and 2021.~~to 2% in the third quarter of 2023.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the third quarter of 2023, we recorded $1.1 million of restructuring charges primarily in our Electronic Materials segment. In the third quarter of 2022, we recorded $0.5 million of restructuring charges primarily in our Precision Optics segment. ~~There were no restructuring charges in~~See Note D to the ~~third quarter of 2021.~~Consolidated Financial Statements for further discussion.

Other-net was ~~$6.8~~$6.2 million of expense in the third quarter of ~~2022,~~2023, or a ~~$3.2~~$0.6 million ~~increase~~decrease from the third quarter of ~~2021, primarily driven by $1.8 million of increased intangible asset amortization expense, related to the acquisition of HCS-Electronic Materials and $0.9 million of increased metal consignment fees.~~2022. Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.

Other non-operating (income)-net includes components of pension and post-retirement expense other than service costs. Refer to Note J to the Consolidated Financial Statements for details of the components.

Interest expense-net was ~~$5.9~~$7.7 million and ~~$0.9~~$5.9 million in the third quarter of ~~2022~~2023 and ~~2021,~~2022, respectively. The increase in interest expense is primarily due to ~~increased borrowings under our revolving credit facility and~~an increase in interest ~~owed on our new term loan,~~rates compared to the ~~proceeds of which were used to fund the purchase price for the acquisition of HCS-Electronic Materials.~~prior year period.

Income tax expense for the third quarter of ~~2022~~2023 was ~~$4.4~~$3.0 million, compared to ~~$3.4~~$4.4 million in the third quarter of ~~2021.~~2022. The effective tax rate for the third quarter of 2023 and 2022 was 10.0% and ~~2021 was~~ 18.2% ~~and 15.9%~~, respectively. The effective tax rate for 2023 was lower than the ~~third quarter~~statutory tax rate primarily due to the impact of ~~both~~the foreign derived intangible income deduction, percentage depletion, research and development and production credits. The effective tax rate for 2022 ~~and 2021~~ was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits and the ~~foreign derived~~foreign-derived intangible income deduction. See Note F to the Consolidated Financial Statements for additional discussion.

Nine Months


		Nine Months Ended										Nine Months Ended
		September 30,			October 1,			$		%				September 29,			September 30,			$		%
(Thousands, except per share data)	(Thousands, except per share data)	2022			2021			Change		Change			(Thousands, except per share data)	2023			2022			Change		Change
Net sales	Net sales	$	1,322,531		$	1,113,413		$	209,118	19	%		Net sales	$	1,244,144		$	1,322,531		$	(78,387)	(6)	%
Value-added sales	Value-added sales	834,420			622,295			212,125		34	%		Value-added sales	837,351			811,417			25,934		3	%
Gross margin	Gross margin	245,461			210,690			34,771		17	%		Gross margin	269,327			245,461			23,866		10	%
Gross margin as a % of value-added sales	Gross margin as a % of value-added sales	29		%	34		%						Gross margin as a % of value-added sales	32		%	30		%
SG&A expense	SG&A expense	122,666			118,031			4,635		4	%		SG&A expense	118,053			122,666			(4,613)		(4)	%
SG&A expense as a % of value-added sales	SG&A expense as a % of value-added sales	15		%	19		%						SG&A expense as a % of value-added sales	14		%	15		%
R&D expense	R&D expense	22,096			19,164			2,932		15	%		R&D expense	21,098			22,096			(998)		(5)	%
R&D expense as a % of value-added sales	R&D expense as a % of value-added sales	3		%	3		%						R&D expense as a % of value-added sales	3		%	3		%
Restructuring (income) expense	Restructuring (income) expense	1,560			(378)			1,938		(513)	%		Restructuring (income) expense	3,194			1,560			1,634		105	%
Other—net	Other—net	18,575			12,272			6,303		51	%		Other—net	18,178			18,575			(397)		(2)	%
Operating profit	Operating profit	80,564			61,601			18,963		31	%		Operating profit	108,804			80,564			28,240		35	%
Other non-operating (income)—net	Other non-operating (income)—net	(3,512)			(3,832)			320		(8)	%		Other non-operating (income)—net	(2,141)			(3,512)			1,371		(39)	%
Interest expense—net	Interest expense—net	14,325			2,480			11,845		478	%		Interest expense—net	22,820			14,325			8,495		59	%
Income before income taxes	Income before income taxes	69,751			62,953			6,798		11	%		Income before income taxes	88,125			69,751			18,374		26	%
Income tax expense	Income tax expense	12,525			10,162			2,363		23	%		Income tax expense	11,891			12,525			(634)		(5)	%
Net income	Net income	$	57,226		$	52,791		$	4,435	8	%		Net income	$	76,234		$	57,226		$	19,008	33	%

Diluted earnings per share	Diluted earnings per share	$	2.76		$	2.56		$	0.20	8	%		Diluted earnings per share	$	3.65		$	2.76		$	0.89	32	%

Net sales of $1,244.1 million in the first nine months of 2023 decreased $78.4 million from $1,322.5 million in the first nine months of ~~2022 increased $209.1 million from $1,113.4 million~~2022. Decreases in net sales in the ~~first nine months of 2021. Increased~~Electronic Materials and Precision Optics segments were partially offset by increased net sales in the Performance Materials segment. Volume decreases in the semiconductor (20%), industrial (13%) and ~~Electronic Materials segments~~consumer electronics (27%) end markets were partially offset by ~~a net sales decrease~~an increase in the ~~Precision Optics segment. Volume and price increases drove growth in our semiconductor (24%),~~

~~industrial (32%), energy (22%) and~~ aerospace and defense ~~(17%~~end market (19%) ~~end markets~~and incremental sales from the clad strip project of $91.4 million when compared to the ~~same period last year. The acquisition~~first nine months of ~~HCS-Electronic Materials, which~~2022. Additionally, there was ~~completed~~a $2.4 million year over year decrease in raw material beryllium hydroxide sales compared to the ~~fourth quarter~~first nine months of ~~2021, accounted for $135.7 million of the net sales increase, most of which are sales into the semiconductor end market.~~2022. See Note CB to the Consolidated Financial Statements for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper market prices unfavorably impacted net sales by ~~$3.7~~$2.9 million during the first nine months of ~~2022~~2023 compared to the same period in the prior year. ~~Additionally, net sales were unfavorably impacted by foreign currency headwinds.~~

Value-added sales of ~~$834.4~~$837.4 million in the first nine months of ~~2022~~2023 increased ~~$212.1~~$25.9 million, or ~~34%~~3%, compared to the first nine months of ~~2021. The acquisition of HCS-Electronic Materials, which was completed~~2022. Despite the decrease in ~~the fourth quarter of 2021, accounted for $135.7 million of the increase. The remaining~~net sales, value-added sales increased due to a shift in mix to higher non-precious metal sales versus precious metal sales commensurate with an increase ~~was driven by increased~~in value-added sales into the ~~industrial (19%), semiconductor (16%), energy (42%) and~~ aerospace and defense ~~(6%~~(23%) end market as well as $91.4 million of incremental sales from the clad strip project. These increases were slightly offset by a $2.4 million decrease in the volume of raw material beryllium hydroxide sales in the first nine months of 2023 when compared to the first nine months of 2022 as well as lower value-added sales into the semiconductor (20%), industrial (7%) and consumer electronics (27%) end markets. ~~Additionally, value-added sales were unfavorably impacted by foreign currency headwinds.~~

Gross margin in the first nine months of ~~2022~~2023 was ~~$245.5~~$269.3 million, ~~which was up 17%~~an increase of 10% compared to the first nine months of ~~2021.~~2022. Gross margin expressed as a percentage of value-added sales ~~decreased~~increased to ~~29%~~32% in the first nine months of ~~2022~~2023 from ~~34%~~30% in the first nine months of ~~2021. The decrease was~~2022. Gross margin increased from the prior year period primarily ~~driven by~~due to $7.5 million of ~~amortization of the~~ inventory step up amortization from the HCS-Electronic Material acquisition ~~made~~that was recorded during the first quarter of 2022 that did not recur in 2023. In addition, the production tax credit recorded in the ~~fourth quarter~~first nine months of ~~2021, pre-production costs associated with~~2023 favorably impacted gross margin. See Note F to the ~~set-up of the new wide area clad facility and other manufacturing inefficiencies.~~Consolidated Financial Statements for further discussion.

SG&A expense was $118.1 million in the first nine months of 2023, compared to $122.7 million in the first nine months of ~~2022, compared to $118.0 million in the first nine months of 2021.~~2022. The ~~increase~~decrease in SG&A expense for the first nine months of ~~2022~~2023 was primarily driven by ~~$4.8~~$4 million of merger and acquisition costs related to the acquisition of HCS-Electronic Materials ~~ongoing spend~~incurred in the first nine months of 2022 that did not recur in 2023 as well as ~~higher costs to support normal growth, partially offset by a~~lower selling related expenses associated with the decrease ~~of $2.1 million~~ in ~~pre or post HCS acquisition spend.~~value-added sales. Expressed as a percentage of value-added sales, SG&A expense was ~~15%~~14% and ~~19%~~15% in the first nine months of ~~2022~~2023 and ~~2021,~~2022, respectively.

R&D expense consists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and applications to deliver new high performing advanced materials to our customers. R&D expense accounted for 3% of value-added sales in the first nine months of both ~~2022~~2023 and ~~2021.~~2022.

Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first nine months of 2023, we recorded a combined total of $3.2 million of restructuring charges in our Electronic Materials, Precision Optics, Performance Materials and Other segments. In the first nine months of 2022, we recorded a combined total of $1.6 million of restructuring charges in our Precision Optics, Electronic Materials and Other segments.

~~During~~ Refer to Note D to the first nine months of 2021, we substantially completed the closure of our Large Area Coatings business and recorded $0.4 million of income related to lower than expected facility closure costs that were recorded in 2020.Consolidated Financial Statements for details.

Other-net was ~~$18.6~~$18.2 million of expense in the first nine months of ~~2022,~~2023, or a ~~$6.3~~$0.4 million ~~increase~~decrease from the first nine months of 2021, primarily driven by $5.9 million of increased intangible asset amortization expense related to the acquisition of HCS-Electronic Materials, as well as $2.1 million of increased metal consignment fees, partially offset by a a $1.7 million decrease in foreign currency losses.2022. Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.

Interest expense-net was ~~$14.3~~$22.8 million and ~~$2.5~~$14.3 million in the first nine months of ~~2022~~2023 and ~~2021,~~2022, respectively. The increase in interest expense is primarily due to ~~increased borrowings under our revolving credit facility and~~an increase in interest ~~owed on our new term loan,~~rates compared to the ~~proceeds of which were used to fund the purchase price for the acquisition of HCS-Electronic Materials.~~prior year period.

Income tax expense for the first nine months of ~~2022~~2023 was ~~$12.5~~$11.9 million, compared to ~~$10.2~~$12.5 million in the nine months of ~~2021.~~2022. The Company's effective tax rate for the first nine months of 2023 and 2022 was 13.5% and ~~2021 was~~ 18.0% ~~and 16.1%~~, respectively. The effective tax rate for ~~each period in~~2023 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development and production credits and the foreign derived intangible income deduction. The effective tax rate for 2022 ~~and 2021~~ was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits and the ~~foreign derived~~foreign-derived intangible income deduction. The effective tax rate for the first nine months of 2023 included a net discrete income tax benefit of $3.4 million, primarily related to excess tax benefits from stock-based compensation awards, return to provision adjustments and an optimization of our foreign-derived intangible income deduction benefit. The effective tax rate for the first nine months of 2022 ~~and 2021~~ included a net discrete income tax benefit of $0.9 million, primarily related to excess tax benefits from stock-based compensation awards and return to provision ~~adjustments recorded.~~adjustments.

3127

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 third quarter and first nine months of ~~2022~~2023 and ~~2021~~2022 is as follows:


		Third Quarter Ended				Nine Months Ended					Third Quarter Ended				Nine Months Ended
		September 30,		October 1,		September 30,		October 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2022		2021		2022		2021		(Thousands)	2023		2022		2023		2022
Net sales	Net sales									Net sales
Performance Materials	Performance Materials	$	169,357	$	136,096	$	473,876	$	375,533	Performance Materials	$	184,642	$	169,357	$	554,427	$	473,876
Electronic Materials	Electronic Materials	230,841		220,723		762,649		638,481		Electronic Materials	192,305		230,841		611,855		762,649
Precision Optics	Precision Optics	27,993		31,209		86,006		99,399		Precision Optics	26,120		27,993		77,862		86,006
Other	Other	—		—		—		—		Other	—		—		—		—
Total	Total	$	428,191	$	388,028	$	1,322,531	$	1,113,413	Total	$	403,067	$	428,191	$	1,244,144	$	1,322,531

Less: pass-through metal costs	Less: pass-through metal costs									Less: pass-through metal costs
Performance Materials	Performance Materials	$	20,525	$	20,929	$	61,959	$	50,936	Performance Materials	$	15,748	$	20,525	$	51,906	$	61,959
Electronic Materials	Electronic Materials	116,977		151,019		424,716		438,928		Electronic Materials	116,772		123,905		354,829		447,719
Precision Optics	Precision Optics	16		—		83		43		Precision Optics	15		16		58		83
Other	Other	248		254		1,353		1,211		Other	—		248		—		1,353
Total	Total	$	137,766	$	172,202	$	488,111	$	491,118	Total	$	132,535	$	144,694	$	406,793	$	511,114

Value-added sales	Value-added sales									Value-added sales
Performance Materials	Performance Materials	$	148,832	$	115,167	$	411,917	$	324,597	Performance Materials	$	168,894	$	148,832	$	502,521	$	411,917
Electronic Materials	Electronic Materials	113,864		69,704		337,933		199,553		Electronic Materials	75,533		106,936		257,026		314,930
Precision Optics	Precision Optics	27,977		31,209		85,923		99,356		Precision Optics	26,105		27,977		77,804		85,923
Other	Other	(248)		(254)		(1,353)		(1,211)		Other	—		(248)		—		(1,353)
Total	Total	$	290,425	$	215,826	$	834,420	$	622,295	Total	$	270,532	$	283,497	$	837,351	$	811,417

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

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

Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the

product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.

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

Segment Results

The Company consists of four reportable segments: Performance Materials, Electronic Materials, Precision Optics, and Other. The Other reportable segment includes unallocated corporate costs.

Performance Materials

Third Quarter


		Third Quarter Ended								Third Quarter Ended
		September 30,		October 1,		$		%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2022		2021		Change		Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	$	169,357	$	136,096	$	33,261	24	%		Net sales	$	184,642	$	169,357	$	15,285	9	%
Value-added sales	Value-added sales	$	148,832	$	115,167	33,665		29	%		Value-added sales	168,894		148,832		20,062		13	%
EBITDA	EBITDA	$	28,866	$	28,917	(51)		—	%		EBITDA	46,366		28,866		17,500		61	%

Net sales from the Performance Materials segment of $184.6 million in the third quarter of 2023 increased 9% compared to net sales of $169.4 million in the third quarter of ~~2022 increased 24% compared to net sales of $136.1 million in the third quarter of 2021.~~2022. The increase in sales was ~~primarily~~ due to favorable pricing and higher volume in the industrial, aerospace and defense as well as energy end markets. In addition, sales attributable to the HCS-Electronic Materials acquisition increased sales in this segment by $9.4 million and incremental sales from the clad strip project of $28.2 million and increased ~~sales~~volumes in the aerospace and defense end market (9%). This increase was partially offset by ~~$13.1 million. Additionally, net sales were unfavorably impacted by foreign currency headwinds.~~decreased volumes in the automotive (22%) and industrial (28%) end markets.

Value-added sales of $168.9 million in the third quarter of 2023 were 13% higher than value-added sales of $148.8 million in the third quarter of ~~2022 were 29% higher than value-added sales of $115.2 million in the third quarter of 2021.~~2022. The increase in value-added sales was due to the same factors driving the increase in net sales.

EBITDA for the Performance Materials segment was ~~$28.9~~$46.4 million ~~in both the third quarter of 2022 and~~ in the third quarter of ~~2021. Despite~~2023, compared to $28.9 million in the third quarter of 2022. The increase in EBITDA in the third quarter of 2023 was primarily due to the same factors driving increases in net sales, ~~EBITDA remained flat primarily due to~~manufacturing efficiencies and the $1.6 million of ~~start up~~startup costs and $4.1 million of additional resource cost and scrap for the new wide area precision strip clad facility ~~and incremental selling, general and administrative expenses~~incurred in the third quarter of the prior year that did not recur in the third quarter of 2023. In addition, we recorded a portion of the expected $10 million annual benefit from the production credit in the third quarter of 2023, which favorably impacted EBITDA. See Note F to the Consolidated Financial Statements for ~~the the HCS-Electronic Materials business.~~further discussion.

Nine Months


		Nine Months Ended								Nine Months Ended
		September 30,		October 1,		$		%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2022		2021		Change		Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	$	473,876	$	375,533	$	98,343	26	%		Net sales	$	554,427	$	473,876	$	80,551	17	%
Value-added sales	Value-added sales	$	411,917	$	324,597	87,320		27	%		Value-added sales	502,521		411,917		90,604		22	%
EBITDA	EBITDA	$	80,886	$	68,027	12,859		19	%		EBITDA	134,061		80,886		53,175		66	%

Net sales from the Performance Materials segment of $554.4 million in the first nine months of 2023 increased 17% compared to net sales of $473.9 million in the first nine months of ~~2022 increased 26%~~2022. The increase in sales was primarily due to incremental sales from the clad strip project of $91.4 million as well an increase in the aerospace and defense (17%) end market, partially offset by decreases in the industrial (8%) and consumer electronics (22%) end markets when compared to ~~net~~the first nine months of 2022. Additionally, there was a $2.4 million year over year decrease in raw material beryllium hydroxide sales compared to the first nine months of 2022.

Value-added sales of ~~$375.5~~$502.5 million in the first nine months of ~~2021. The increase in sales was due to~~2023 were 22% higher volume in industrial, aerospace and defense and energy end markets. In addition, sales from HCS-Electronic Materials increased sales in this segment by $24.0 million and incremental sales from the clad strip project increased sales by $15.6 million. These impacts were slightly offset by a decrease in the defense end market, a slight decrease in automotive market sales as a result of the global chip shortage impacting the timing of demand and foreign currency headwinds

~~Value-added~~than value-added sales of $411.9 million in the first nine months of ~~2022 were 27% higher than value-added sales of $324.6 million in the first nine months of 2021.~~2022. The increase in value-added sales was due to the same factors driving the increase in net sales.

EBITDA for the Performance Materials segment was $134.1 million in the first nine months of 2023 compared to $80.9 million in the first nine months of ~~2022 compared to $68.0 million in the first nine months of 2021.~~2022. The increase in EBITDA was primarily due to the same factors driving ~~the increase~~increases in net sales, ~~partially offset by acquisition~~manufacturing efficiencies and ~~integration costs of $2.7 million, primarily related~~due to ~~purchase accounting inventory step up charges, as well as~~the $9.8 million of ~~incremental start up~~startup costs and $4.1 million of additional resource cost

and scrap for the new wide area precision strip clad facility ~~manufacturing inefficiencies~~incurred in the prior year period and ~~incremental selling, general~~$2.7 million of merger and ~~administrative expenses~~acquisition costs incurred in the prior year period that did not recur in 2023. In addition, we recorded a portion of the expected $10 million annual benefit from the production credit in the first nine months of 2023, which favorably impacted EBITDA. See Note F to the Consolidated Financial Statements for ~~the HCS-Electronic Materials business.~~further discussion.

Electronic Materials

Third Quarter


		Third Quarter Ended					Third Quarter Ended
		September 30,	October 1,	$	%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2022	2021	Change	Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	230,841	220,723	10,118	5	%		Net sales	$	192,305	$	230,841	$	(38,536)	(17)	%
Value-added sales	Value-added sales	113,864	69,704	44,160	63	%		Value-added sales	75,533		106,936		(31,403)		(29)	%
EBITDA	EBITDA	16,853	11,326	5,527	49	%		EBITDA	10,155		16,853		(6,698)		(40)	%

Net sales from the Electronic Materials segment of $192.3 million in the third quarter of 2023 were 17% lower than net sales of $230.8 million in the third quarter of ~~2022 were 5% higher than net sales of $220.7 million in the third quarter of 2021.~~2022. The ~~increase~~decrease in net sales was primarily due to ~~$39.9 million in net~~lower sales ~~from the HCS-Electronic Materials acquisition. The net sales increase from HCS-Electronic Materials was offset by higher customer owned precious metal transactions~~volumes in the semiconductor ~~market, lower precious metal prices impacting net sales by $8.2 million as well as foreign currency headwinds.~~(18%) end market.

Value-added sales of ~~$113.9~~$75.5 million in the third quarter of ~~2022 increased 63%~~2023 decreased 29% compared to value-added sales of ~~$69.7~~$106.9 million in the third quarter of ~~2021.~~2022. The ~~increase was primarily driven by $39.9 million~~decrease in value-added sales ~~from~~was due to the ~~HCS-Electronic Materials acquisition and an increase~~same factors driving the decrease in ~~value-added sales in the semiconductor end market. The impact of these items were partially offset by foreign currency headwinds.~~net sales.

EBITDA for the Electronic Materials segment was $10.2 million in the third quarter of 2023 compared to $16.9 million in the third quarter of ~~2022 compared~~2022. The decrease in EBITDA was due to ~~$11.3 million~~decreased sales volumes, partially offset by decreases in manufacturing and SG&A expenses as a result of various targeted cost control initiatives implemented in the ~~third~~second quarter of 2021. The increase in EBITDA is primarily due to incremental EBITDA from HCS-Electronic Materials despite the impact of short term tantalum raw material headwinds, as well as the impacts of increased sales.2023.

Nine Months


		Nine Months Ended					Nine Months Ended
		September 30,	October 1,	$	%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2022	2021	Change	Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	762,649	638,481	124,168	19	%		Net sales	$	611,855	$	762,649	$	(150,794)	(20)	%
Value-added sales	Value-added sales	337,933	199,553	138,380	69	%		Value-added sales	257,026		314,930		(57,904)		(18)	%
EBITDA	EBITDA	51,338	32,668	18,670	57	%		EBITDA	37,504		51,338		(13,834)		(27)	%

Net sales from the Electronic Materials segment of $611.9 million in the first nine months of 2023 were 20% lower than net sales of $762.6 million in the first nine months of ~~2022 were 19% higher than~~2022. The decrease in net sales was primarily due to lower sales volumes in the semiconductor (21%) end market. Additionally, pass-through metal price fluctuations reduced net sales by $3.5 million compared to the first nine months of ~~$638.5~~2022.

Value-added sales of $257.0 million in the first nine months of ~~2021. The increase in net sales was primarily due~~2023 decreased 18% compared to $112.2 million from the HCS-Electronic Materials acquisition and higher organic sales volumes in the semiconductor, industrial and medical end markets. These impact of these items were partially offset by $6.8 million in lower precious metal prices and the impact of foreign currency headwinds.

~~Value-added~~value-added sales of ~~$337.9~~$314.9 million in the first nine months of ~~2022 increased 69% compared to value-added sales of $199.6 million in the first nine months of 2021.~~2022. The ~~increase was primarily driven by $112.2 million~~decrease in value-added sales ~~from~~was due to the ~~HCS-Electronic Materials acquisition as well as higher organic sales volumes into~~same factors driving the ~~semiconductor, industrial, and energy end markets. The impact of these items were partially offset by foreign currency headwinds.~~decrease in net sales.

EBITDA for the Electronic Materials segment was $37.5 million in the first nine months of 2023 compared to $51.3 million in the first nine months of ~~2022 compared to $32.7 million in the first nine months of 2021.~~2022. The ~~increase~~decrease in EBITDA ~~is primarily~~was due to ~~incremental EBITDA from HCS-Electronic Materials, as well as the impacts of increased~~decreased sales volumes, partially offset by decreases in manufacturing and SG&A expenses as a result of various targeted cost control initiatives implemented in 2023 as well as lower merger and acquisition costs of $6.8 million incurred in the ~~amortization of the HCS-Electronic Material inventory step up of $5.0 million.~~prior year period that did not recur in 2023.

3430

Precision Optics

Third Quarter


(Thousands)	(Thousands)	Third Quarter Ended					(Thousands)	Third Quarter Ended
		September 30,	October 1,	$	%			(Thousands)		September 29,		September 30,		$		%
		2022	2021	Change	Change					2023		2022		Change		Change
Net sales	Net sales	27,993	31,209	(3,216)	(10)	%				$	26,120	$	27,993	$	(1,873)	(7)		%
Value-added sales	Value-added sales	27,977	31,209	(3,232)	(10)	%			Value-added sales		26,105		27,977		(1,872)		(7)		%
EBITDA	EBITDA	3,546	6,228	(2,682)	(43)	%			EBITDA		3,261		3,546		(285)		(8)		%

Net sales from the Precision Optics segment of ~~$28.0~~$26.1 million in the third quarter of ~~2022~~2023 decreased ~~10%~~7% compared to net sales of $31.2 million in the third quarter of 2021. The change was primarily driven by a reduction in sales related to lower volumes in the aerospace and defense and industrial end markets, the discontinuation of a consumer electronic application as well as foreign currency headwinds.

~~Value-added~~ sales of $28.0 million in the third quarter of ~~2022~~2022. The decrease was primarily due to lower sales volumes as a result of a reduction in sales related to COVID-19 PCR testing programs as well as decreased ~~10% compared~~sales in the consumer electronics end market (37%), which was primarily due to ~~value-added~~the discontinuation of a consumer electronic application. These decreases were partially offset by an increase in sales volumes in the aerospace and defense (102%) end market.

Value-added sales of ~~$31.2~~$26.1 million in the third quarter of ~~2021.~~2023 decreased 7% compared to value-added sales of $28.0 million in the third quarter of 2022. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Precision Optics segment was $3.3 million in the third quarter of 2023 compared to $3.5 million in the third quarter of ~~2022 compared to $6.2 million in the third quarter of 2021.~~2022. The decrease in EBITDA was driven by decreased volumes, ~~unfavorable product mix, and restructuring charges taken during the quarter.~~partially offset by targeted cost control initiatives implemented in 2023.

Nine Months


(Thousands)	(Thousands)	Nine Months Ended					(Thousands)	Nine Months Ended
		September 30,	October 1,	$	%			(Thousands)		September 29,		September 30,		$		%
		2022	2021	Change	Change					2023		2022		Change		Change
Net sales	Net sales	86,006	99,399	(13,393)	(13)	%				$	77,862	$	86,006	$	(8,144)	(9)		%
Value-added sales	Value-added sales	85,923	99,356	(13,433)	(14)	%			Value-added sales		77,804		85,923		(8,119)		(9)		%
EBITDA	EBITDA	9,281	19,246	(9,965)	(52)	%			EBITDA		7,654		9,281		(1,627)		(18)		%

Net sales from the Precision Optics segment of $77.9 million in the first nine months of 2023 decreased 9% compared to net sales of $86.0 million in the first nine months of ~~2022 decreased 13% compared to net sales of $99.4 million in the first nine months of 2021.~~2022. The ~~change~~decrease was primarily ~~driven by~~due to lower sales volumes as a result of a reduction in sales related to COVID-19 PCR testing programs as well as decreased sales in the consumer electronics end market (38%), which was primarily due to the discontinuation of a consumer electronic ~~application, foreign currency headwinds~~application. These decreases were partially offset by an increase in sales volumes in the aerospace and ~~the temporary government-mandated shut down~~defense (44%) end market.

Value-added sales of ~~our Shanghai facility due to COVID-19~~$77.8 million in the first ~~and second quarters~~nine months of ~~2022.~~

~~Value-added~~2023 decreased 9% compared to value-added sales of $85.9 million in the first nine months of ~~2022 decreased 14% compared to value-added sales of $99.4 million in the first nine months of 2021.~~2022. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Precision Optics segment was $7.7 million in the first nine months of 2023 compared to $9.3 million in the first nine months of ~~2022 compared to $19.2 million in the first nine months of 2021.~~2022. The decrease in EBITDA was driven by decreased volumes ~~the temporary shut down of the Shanghai facility~~partially offset by targeted cost control initiatives implemented in ~~the first and second quarters of 2022, related unabsorbed costs and restructuring charges incurred during the first nine months of 2022.~~2023.

Other

Third Quarter


(Thousands)	(Thousands)	Third Quarter Ended							(Thousands)	Third Quarter Ended
		September 30,		October 1,		$	%			September 29,		September 30,		$		%
		2022		2021		Change	Change			2023		2022		Change		Change
Net sales	Net sales	$	—	$	—	—	—	%	Net sales	$	—	$	—	$	—	—	%
Value-added sales	Value-added sales	(248)		(254)		6	(2)	%	Value-added sales	—		(248)		248		(100)	%
EBITDA	EBITDA	(5,839)		(10,617)		4,778	(45)	%	EBITDA	(7,497)		(5,839)		(1,658)		28	%

The Other reportable segment in total includes unallocated corporate costs.

3531

Corporate costs were $7.5 million in the third quarter of 2023 compared to $5.8 million in the third quarter of ~~2022 compared to $10.6 million in the third quarter of 2021.~~2022. Corporate costs ~~decreased~~increased from 5%2% of Company-wide value-added sales in the third quarter of ~~2021~~2022 to 2%3% in the third quarter of ~~2022.~~2023. The ~~decrease~~increase in corporate costs in the third quarter of ~~2022~~2023 compared to the third quarter of ~~2021~~2022 is primarily ~~related to acquisition costs~~driven by changes in ~~2021 that did not reoccur in 2022.~~variable-based compensation and incentives.

Nine Months


(Thousands)	(Thousands)	Nine Months Ended							(Thousands)	Nine Months Ended
		September 30,		October 1,		$	%			September 29,		September 30,		$		%
		2022		2021		Change	Change			2023		2022		Change		Change
Net sales	Net sales	$	—	$	—	—	—	%	Net sales	$	—	$	—	$	—	—	%
Value-added sales	Value-added sales	(1,353)		(1,211)		(142)	12	%	Value-added sales	—		(1,353)		1,353		(100)	%
EBITDA	EBITDA	(18,206)		(22,030)		3,824	(17)	%	EBITDA	(21,750)		(18,206)		(3,544)		19	%

Corporate costs were $21.8 million in the first nine months of 2023 compared to $18.2 million in the first nine months of ~~2022 compared to $22.0 million in the first nine months of 2021.~~2022. Corporate costs ~~accounted for~~increased from 2% ~~and 4%~~ of Company-wide value-added sales in the first nine months of 2022 ~~and 2021, respectively.~~to 3% in the first nine months of 2023. The ~~decrease~~increase in corporate costs in the first nine months of ~~2022~~2023 compared to the first nine months of ~~2021~~2022 is primarily ~~related to 2021 acquisition costs that did not reoccur~~driven by changes in ~~2022. This is offset slightly by an increase in employee related costs.~~variable-based compensation and incentives.

3632

FINANCIAL POSITION

Cash Flow

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


		Nine Months Ended						Nine Months Ended
		September 30,		October 1,		$				September 29,		September 30,		$
(Thousands)	(Thousands)	2022		2021		Change			(Thousands)	2023		2022		Change
Net cash provided by operating activities	Net cash provided by operating activities	$	34,204	$	40,518	$	(6,314)		Net cash provided by operating activities	$	84,505	$	34,204	$	50,301
Net cash used in investing activities	Net cash used in investing activities	(56,380)		(76,954)		20,574			Net cash used in investing activities	(94,160)		(56,380)		(37,780)
Net cash provided by financing activities	Net cash provided by financing activities	31,349		28,779		2,570			Net cash provided by financing activities	13,735		31,349		(17,614)
Effects of exchange rate changes	Effects of exchange rate changes	(2,953)		(212)		(2,741)			Effects of exchange rate changes	(780)		(2,953)		2,173
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	6,220	$	(7,869)	$	14,089		Net change in cash and cash equivalents	$	3,300	$	6,220	$	(2,920)

Net cash provided by operating activities totaled ~~$34.2~~$84.5 million in the first nine months of ~~2022~~2023 versus ~~$40.5~~$34.2 million in the prior-year period. The ~~decrease~~period over period increase in cash provided by operating ~~cash flow~~activities from the prior year period was primarily due to ~~cash used to fund higher~~increased net earnings as well as favorable changes in working capital, primarily inventory and accounts receivable, primarily due to higher inventory to support increasing demand and sales and higher incentive compensation paid out in the first quarter, partially offset by a higher net income and an increase in unearned income due to customer prepayments totaling $17.5 million received in the second and third quarters of 2022 vs the $9.0 million received through nine months in 2021.working capital initiatives during 2023.

Net cash used in investing activities was ~~$56.4~~$94.2 million in the first nine months of ~~2022~~2023 compared to ~~$77.0~~$56.4 million in the prior-year ~~period~~period. The increase in cash used in investing activities is due to ~~decrease in~~increased capital expenditures ~~primarily related~~and mine development, as expected, to investments in new equipment funded by customer prepayments in 2021. See Note I to the Consolidated Financial Statements for additional discussion. Additionally, the Company paid a working capital true-up of approximately $3.0 million during the second quarter of 2022 related to the HCS-Electronic Materials acquisition. See Note B to the Consolidated Financial Statements for additional discussion.support continued business growth.

Capital expenditures are made primarily ~~driven by customer partnerships like the precision clad strip project and investments within our HCS-Electronic Materials operations as well as infrastructure~~ for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year ~~2022,~~2023, the Company expects payments for property, plant, and equipment to be approximately ~~$90~~$105 million.

Net cash provided by financing activities totaled ~~$31.3~~$13.7 million in the first nine months of ~~2022~~2023 and ~~$28.8~~$31.3 million in the comparable prior-year period. The ~~increase~~decrease is primarily due to ~~net~~a decrease in borrowings ~~of $49.1 million~~ under our revolving credit ~~facility~~facilities in the first nine months of ~~2022,~~2023 of $39.6 million, compared to net borrowings of ~~$43.0~~$55.7 million in the same period in the prior year.

Liquidity

We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend program, environmental remediation projects, and strategic acquisitions for at least the next twelve months and for the foreseeable future thereafter. At September ~~30, 2022,~~29, 2023, cash and cash equivalents held by our foreign operations totaled ~~$17.0~~$15.8 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of September ~~30, 2022~~29, 2023 and December 31, ~~2021~~2022 is as follows:


		September 30,		December 31,			September 29,		December 31,
(Thousands)	(Thousands)	2022		2021		(Thousands)	2023		2022
Cash and cash equivalents	Cash and cash equivalents	$	20,682	$	14,462	Cash and cash equivalents	$	16,401	$	13,101
Total outstanding debt	Total outstanding debt	494,027		449,474		Total outstanding debt	460,995		431,981
Net debt	Net debt	$	(473,345)	$	(435,012)	Net debt	$	(444,594)	$	(418,880)
Available borrowing capacity	Available borrowing capacity	$	127,169	$	176,419	Available borrowing capacity	$	150,996	$	185,294

Net debt is a non-GAAP financial measure. We are providing this information because we believe it is more indicative of our overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods.

The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation, depletion and amortization, and other adjustments.

In ~~2021,~~January 2023, we amended ~~and restated~~ the agreement governing our $375.0 million revolving credit facility and term loan facility (Credit Agreement).

Pursuant to the amendment, we transitioned U.S. dollar denominated borrowings from LIBOR to SOFR for both the revolving credit agreement and the term loan and increased the cap on precious metals consignment line from $600 million to $615 million.

The Company had previously amended and restated the Credit Agreement in connection with the HCS-Electronic Materials ~~acquisition.~~acquisition in November 2021. A ~~$300.0~~$300 million delayed draw term loan facility was added to the Credit Agreement and the maturity date of the Credit Agreement was extended from 2024 to 2026. Moreover, the Credit Agreement also provides for an uncommitted incremental facility whereby, under certain conditions, the Company may be able to borrow additional term loans in an aggregate amount not to exceed $150.0 million. The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment ~~borrowing, or leasing~~ of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives. Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property, precious metal, copper and certain other assets.

The Credit Agreement allows the Company to borrow money at a premium over ~~LIBOR~~SOFR, following the January 2023 amendment or prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions stipulated in the agreement. The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants that limit the Company to a maximum leverage ratio and a ~~maximum~~minimum interest coverage ratio. We were in compliance with all of our debt covenants as of September ~~30, 2022~~29, 2023 and December 31, ~~2021.~~2022. Cash on hand up to $25.0 million can benefit the covenants and may benefit the borrowing capacity under the Credit Agreement.

In November 2021, we completed the acquisition of HCS-Electronic Materials. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300.0 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103.0 million of borrowings under its amended revolving credit facility. The interest rate for the term loan is based on ~~LIBOR~~SOFR, following the January 2023 amendment, plus a tiered rate determined by the Company's quarterly leverage ratio.

Portions of our business utilize off-balance sheet consignment arrangements allowing us to use ~~bank~~metal owned by precious metal consignors as we manufacture product for our customers. Metal is purchased from the ~~consignee~~precious metal consignor and sold to our customer at the time of product shipment. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. In ~~the third quarter of~~August 2022, we entered into a precious metals consignment agreement, maturing on August 31, 2025, which replaced the consignment ~~agreement~~agreements that would have matured on August 27, 2022. The available and unused capacity under the metal consignment ~~lines~~agreements expiring in August 2025 totaled approximately ~~$260.8~~$270.2 million as of September ~~30, 2022,~~29, 2023, compared to ~~$69.8~~$241.9 million as of December 31, ~~2021 under the metal financing lines that expired on August 27,~~ 2022. The availability is determined by Board approved levels and actual ~~line~~ capacity.

In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. We did not repurchase any shares under this program in the third quarter or first nine months of ~~2022.~~2023. Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million.

We paid cash dividends of ~~$2.6~~$2.7 million and ~~$7.6~~$7.9 million on our common stock in the third quarter and first nine months of ~~2022.~~2023, respectively. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.

3834

OFF-BALANCE SHEET ARRANGEMENTS AND CASH OBLIGATIONS

We maintain the majority of the precious metals and portions of the copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$354.2~~$344.8 million and ~~$480.2~~$373.1 million as of September ~~30, 2022~~29, 2023 and December 31, ~~2021,~~2022, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of September ~~30, 2022.~~29, 2023. For additional information on our material cash obligations, refer to our ~~2021~~2022 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. For additional information regarding critical accounting policies, please refer to our ~~2021~~2022 Annual Report on Form 10-K.

Forward-looking Statements: Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking statements. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. These factors include, in addition to those mentioned elsewhere herein: the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and liquidity, including shut downs of our facilities; our ability to achieve the strategic and other objectives related to the HCS-Electronic Materials acquisition, including any expected synergies; the global economy, including inflationary pressures, potential future recessionary conditions and the impact of tariffs and trade agreements; the impact of any U.S. Federal Government shutdowns or sequestrations; the condition of the markets which we serve, whether defined geographically or by segment; changes in product mix and the financial condition of customers; our success in developing and introducing new products and new product ramp-up rates; our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values; our success in identifying acquisition candidates and in acquiring and integrating such ~~businesses, including the integration of the HCS-Electronic Materials business;~~businesses; the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions; our success in implementing our strategic plans and the timely and successful start-up and completion of any capital projects; other financial and economic factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal consignment fees, tax rates, exchange rates, interest rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, credit availability, and the impact of the Company’s stock price on the cost of incentive compensation plans; the uncertainties related to the impact of war, ~~including the conflict between Russia and Ukraine,~~ terrorist activities, and acts of God; changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations; the conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects; the disruptions in operations from, and other effects of, catastrophic and other extraordinary events including outbreaks of infectious diseases and the ~~COVID-19 pandemic;~~conflict between Russia and Ukraine and other hostilities; realization of expected financial benefits expected from the Inflation Reduction Act of 2022; and the risk factors set forth in Part 1, Item 1A of the Company's ~~2021~~2022 Annual Report on Form 10-K.


Item 3.			Quantitative and Qualitative Disclosures about Market Risk

For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our ~~2021~~2022 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our ~~2021~~2022 Annual Report on Form 10-K.

3935


Item 4.			Controls and Procedures

a)Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with participation of the Company's management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of disclosure controls and procedures as of September ~~30, 2022~~29, 2023 pursuant to Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that disclosure controls and procedures are effective as of September ~~30, 2022.~~29, 2023.

b)Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September ~~30, 2022~~29, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

4036

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.

Beryllium Claims

As of September ~~30, 2022, our subsidiary, Materion Brush Inc., was a defendant in~~29, 2023, there were no pending beryllium cases. During the quarter ended September 29, 2023, one beryllium ~~case.~~case was dismissed. In Richard Miller v. Dolphin, Inc. et al., case number CV2020-005163, filed in the Superior Court of Arizona, Maricopa County, the Company iswas one of six named defendants and 100 Doe defendants. The plaintiff ~~alleges~~alleged 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~~asserted claims for negligence, strict liability – failure to warn, strict liability – design defect, and fraudulent concealment. The plaintiff ~~seeks~~sought general damages, medical expenses, loss of earnings, consequential damages, and punitive damages, and his wife ~~claims~~claimed loss of consortium. A co-defendant, Dolphin, Inc., filed a cross-claim against the Company for indemnification. On August 12, 2020, the Company moved to dismiss the cross-claim for failure to state a claim upon which relief can be granted. The court denied the motion on October 23, 2020. On December 7, 2020, the Company filed a Petition for Special Action in the Court of Appeals seeking to appeal the denial of the motion to dismiss the cross-claim. The Court of Appeals declined to accept jurisdiction on December 30, 2020. ~~The~~On March 30, 2023, the court dismissed all claims against four of the Company’s codefendants, as well as the cross-claim by those codefendants against the Company, pursuant to a confidential settlement agreement between those codefendants and the plaintiffs. Following a court-ordered mediation on June 20, 2023, the Company and the other remaining defendant entered into a ~~scheduling~~confidential settlement agreement with plaintiffs, pursuant to which all remaining claims in the case were to be dismissed with prejudice. On August 2, 2023, an order ~~on September 14, 2021 that did not set a date~~granting stipulation for trial. Amended scheduling orders were entered on April 8, 2022, and August 4, 2022, that likewise did not set a trial date. The Company believes that it has substantive defenses and intends to vigorously defend this suit.dismissal with prejudice was filed by the court.

No beryllium cases were filed in the third quarter of ~~2022.~~2023.

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

Other Claims

On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. Plaintiff filed a motion for conditional certification, which the Company opposed. On August 2, 2022, the Court conditionally certified a class of employees at the Company’s Elmore facility only and rejected certification of a class across the Company’s other facilities.In November 2022, the parties reached a settlement for an immaterial amount. The ~~Company believes that it has substantive defenses~~Court preliminarily approved the settlement on March 30, 2023 and ~~intends~~a final approval hearing was held on July 6, 2023. There were no objections to ~~vigorously defend this suit, absent a negotiated resolution.~~the settlement and the Court entered an order approving the final settlement on July 7, 2023, and the settlement amount was subsequently paid out prior to the end of the third quarter.

4137


Item 2.			Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds and Issuer Purchases of Equity Securities

The following table presents information with respect to repurchases of common stock made by the Company during the three months ended September ~~30, 2022~~29, 2023.

Period Total Number of Shares Purchased (1) Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 2 through August 5, 2022 — $ — — $ 8,316,239
August 6 through September 2, 2022 2,523 96.79 — 8,316,239
September 3 through September 30, 2022 — — — 8,316,239
Total 2,523 $ 96.79 — $ 8,316,239


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 through August 4, 2023	905	$	120.67	—	$	8,316,239
August 5 through September 1, 2023	791	107.02		—	8,316,239
September 2 through September 29, 2023	342	101.98		—	8,316,239
Total	2,038	$	112.23	—	$	8,316,239


(1)			Represents shares surrendered to the Company by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.

(2)			On January 14, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to $50.0 million of its common stock. During the three months ended September ~~30, 2022,~~29, 2023, the Company did not repurchase any shares under this program. As of September ~~30, 2022,~~29, 2023, $8.3 million may still be purchased under the program.


Item 4.			Mine Safety Disclosures

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

4238


Item 5.			Other Information

During the quarter ended September 29, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).


Item 6.			Exhibits

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


31.1						Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)*
31.2						Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)*
32						Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350*
~~10.1~~						~~Amended and Restated Metals Consignment Agreement, dated as of August 12, 2022~~ ~~(filed as Exhibit 10.1 to the Company's 8-K filed on August 15, 2022), incorporated herein by reference.~~
95						Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended September 30 ~~, 2022~~29, 2023*
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.

4339

SIGNATURES

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

MATERION CORPORATION

Dated: November ~~2, 2022~~1, 2023

/s/ Shelly M. Chadwick

Shelly M. Chadwick

Vice President, Finance and Chief Financial Officer

(Principal Financial and Accounting Officer)

4440


(Thousands)	Initial Allocation of Consideration		Measurement Period Adjustments		Updated Allocation
Assets:
Cash and cash equivalents	$	3,685	$	—	$	3,685
Accounts receivable	28,352		(132)		28,220
Inventories	70,681		—		70,681
Prepaid and other current assets	660		(355)		305
Property, plant, and equipment	44,681		355		45,036
Operating lease, right-of-use assets	6,120		—		6,120
Intangible assets	107,800		—		107,800
Other long-term assets	4,528		—		4,528
Goodwill	178,181		4,010		182,191
Total assets acquired	$	444,688	$	3,878	$	448,566

Liabilities:
Accounts payable	$	12,139	$	—	$	12,139
Salaries and wages	2,516		625		3,141
Other liabilities and accrued items	28		—		28
Income taxes	2,183		79		2,262
Other long-term liabilities	5,543		215		5,758
Operating lease liabilities	6,042		—		6,042
Deferred income taxes	20,300		—		20,300
Total liabilities assumed	$	48,751	$	919	$	49,670
Net assets acquired	$	395,937	$	2,959	$	398,896


	(Unaudited)
	Three months ended		Nine months ended
	October 1, 2021		October 1, 2021
Net Sales	$	428,864	$	1,223,450
Income before taxes	$	23,022	$	65,926


(Thousands)	Third Quarter 2022		Third Quarter 2021		First Nine Months 2022		First Nine Months 2021
Net sales:
Performance Materials(1)	$	169,357	$	136,096	$	473,876	$	375,533
Electronic Materials(1)	230,841		220,723		762,649		638,481
Precision Optics	27,993		31,209		86,006		99,399
Other	—		—		—		—
Net sales	428,191		388,028		1,322,531		1,113,413
Segment EBITDA:
Performance Materials	$	28,866	$	28,917	$	80,886	$	68,027
Electronic Materials	16,853		11,326		51,338		32,668
Precision Optics	3,546		6,228		9,281		19,246
Other	(5,839)		(10,617)		(18,206)		(22,030)
Total Segment EBITDA	43,426		35,854		123,299		97,911
Income tax expense	4,432		3,422		12,525		10,162
Interest expense - net	5,888		861		14,325		2,480
Depreciation, depletion and amortization	13,154		$	13,415	$	39,223	$	32,478
Net income	$	19,952	$	18,156	$	57,226	$	52,791