MATERION Corp 10-Q

Item 1. Financial Statements Materion Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Third Quarter Ended Nine Months Ended (Thousands, except per share amounts) October 1, 2021 September 25, 2020* October 1, 2021 September 25, 2020* Net sales $ 388,028 $ 287,171 $ 1,113,413 $ 836,585 Cost of sales 313,715 241,860 902,723 699,749 Gross margin 74,313 45,311 210,690 136,836 Selling, general, and administrative expense 43,195 35,696 118,031 99,292 Research and development expense 6,354 5,417 19,164 14,104 Goodwill impairment charges — — — 9,053 Asset impairment charges — — — 1,713 Restructuring (income) expense — 2,593 ( 378 ) 7,144 Other—net 3,604 2,221 12,272 4,143 Operating profit (loss) 21,160 ( 616 ) 61,601 1,387 Other non-operating income—net ( 1,279 ) ( 1,076 ) ( 3,832 ) ( 2,871 ) Interest expense—net 861 1,334 2,480 2,839 Income (Loss) before income taxes 21,578 ( 874 ) 62,953 1,419 Income tax expense (benefit) 3,422 ( 6,345 ) 10,162 ( 5,977 ) Net income $ 18,156 $ 5,471 $ 52,791 $ 7,396 Basic earnings per share: Net income per share of common stock $ 0.89 $ 0.27 $ 2.59 $ 0.36 Diluted earnings per share: Net income per share of common stock $ 0.88 $ 0.27 $ 2.56 $ 0.36 Weighted-average number of shares of common stock outstanding: Basic 20,439 20,325 20,414 20,342 Diluted 20,657 20,592 20,659 20,595 * Amounts for the periods ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K. See notes to these consolidated financial statements. 2 Materion Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited) Third Quarter Ended Nine Months Ended October 1, September 25, October 1, September 25, (Thousands) 2021 2020* 2021 2020* Net income $ 18,156 $ 5,471 $ 52,791 $ 7,396 Other comprehensive (loss) income: Foreign currency translation adjustment ( 2,029 ) 3,076 ( 7,693 ) 3,369 Derivative and hedging activity, net of tax 439 ( 315 ) 1,411 ( 822 ) Pension and post-employment benefit adjustment, net of tax 121 29 368 134 Other comprehensive (loss) income ( 1,469 ) 2,790 ( 5,914 ) 2,681 Comprehensive income $ 16,687 $ 8,261 $ 46,877 $ 10,077 * Amounts for the periods ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K. See notes to these consolidated financial statements. 3 Materion Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) October 1, Dec. 31, (Thousands) 2021 2020 Assets Current assets Cash and cash equivalents $ 18,009 $ 25,878 Accounts receivable, net 190,601 166,447 Inventories, net 311,745 250,778 Prepaid and other current assets 36,138 20,896 Total current assets 556,493 463,999 Deferred income taxes 1,908 3,134 Property, plant, and equipment 1,069,592 998,312 Less allowances for depreciation, depletion, and amortization ( 715,158 ) ( 688,626 ) Property, plant, and equipment, net 354,434 309,686 Operating lease, right-of-use assets 56,556 62,089 Intangible assets, net 49,012 54,672 Other assets 23,269 19,364 Goodwill 140,990 144,916 Total Assets $ 1,182,662 $ 1,057,860 Liabilities and Shareholders’ Equity Current liabilities Short-term debt $ 529 $ 1,937 Accounts payable 71,576 55,640 Salaries and wages 37,168 18,809 Other liabilities and accrued items 54,749 40,887 Income taxes 439 1,898 Unearned revenue 8,308 7,713 Total current liabilities 172,769 126,884 Other long-term liabilities 17,572 17,002 Operating lease liabilities 52,177 56,761 Finance lease liabilities 17,285 20,539 Retirement and post-employment benefits 39,216 41,877 Unearned income 93,061 86,761 Deferred income taxes 14,118 15,864 Long-term debt 79,036 36,542 Shareholders’ equity Serial preferred stock ( no par value; 5,000 authorized shares, no ne issued) — — Common stock ( no par value; 60,000 authorized shares, issued shares of 27,148 at both October 1 st and December 31 st ) 269,716 258,642 Retained earnings 676,527 631,058 Common stock in treasury ( 208,952 ) ( 199,187 ) Accumulated other comprehensive loss ( 44,553 ) ( 38,639 ) Other equity 4,690 3,756 Total shareholders' equity 697,428 655,630 Total Liabilities and Shareholders’ Equity $ 1,182,662 $ 1,057,860 See the notes to these consolidated financial statements. 4 Materion Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended October 1, September 25, (Thousands) 2021 2020* Cash flows from operating activities: Net income $ 52,791 $ 7,396 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 32,478 32,042 Amortization of deferred financing costs in interest expense 546 547 Stock-based compensation expense (non-cash) 4,924 3,989 Deferred income tax benefit ( 263 ) ( 5,981 ) Impairment charges — 10,766 Changes in assets and liabilities, net of acquired assets and liabilities: Accounts receivable ( 26,041 ) 13,899 Inventory ( 62,353 ) ( 6,414 ) Prepaid and other current assets ( 7,020 ) ( 686 ) Accounts payable 14,863 6,281 Accrued expenses 20,451 ( 16,040 ) Unearned revenue 650 ( 298 ) Interest and taxes payable ( 1,504 ) 143 Unearned income due to customer prepayments 9,022 40,385 Other-net 1,974 ( 6,585 ) Net cash provided by operating activities 40,518 79,444 Cash flows from investing activities: Payments for acquisition, net of cash acquired — ( 130,715 ) Payments for purchase of property, plant, and equipment ( 77,640 ) ( 46,285 ) Proceeds from settlement of currency exchange contract — 3,249 Proceeds from sale of property, plant, and equipment 686 35 Net cash used in investing activities ( 76,954 ) ( 173,716 ) Cash flows from financing activities: Proceeds from borrowings under revolving credit agreement, net 43,010 120,000 Repayment of long-term debt ( 1,803 ) ( 16,357 ) Principal payments under finance lease obligations ( 2,152 ) ( 1,440 ) Cash dividends paid ( 7,243 ) ( 6,920 ) Repurchase of common stock — ( 6,766 ) Payments of withholding taxes for stock-based compensation awards ( 3,033 ) ( 2,212 ) Net cash provided by financing activities 28,779 86,305 Effects of exchange rate changes ( 212 ) 714 Net change in cash and cash equivalents ( 7,869 ) ( 7,253 ) Cash and cash equivalents at beginning of period 25,878 125,007 Cash and cash equivalents at end of period $ 18,009 $ 117,754 * Amounts for the period ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K. See notes to these consolidated financial statements. 5 Materion Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity (Unaudited) Common Shares Shareholders' Equity (Thousands, except per share amounts) Common Shares Common Shares Held in Treasury Common Stock Retained Earnings* Common Stock in Treasury Accumulated Other Comprehensive Loss Other Equity Total* 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 ($ 0.12 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 Balance at June 26, 2020 20,322 ( 6,826 ) $ 256,756 $ 622,219 $ ( 198,726 ) $ ( 45,571 ) $ 3,678 $ 638,356 Net income — — — 5,471 — — — 5,471 Other comprehensive income — — — — — 2,790 — 2,790 Cash dividends declared ($ 0.115 per share) — — — ( 2,338 ) — — — ( 2,338 ) Stock-based compensation activity 7 7 235 19 ( 231 ) — — 23 Payments of withholding taxes for stock-based compensation awards ( 3 ) ( 3 ) — — ( 187 ) — — ( 187 ) Directors’ deferred compensation 1 1 28 — ( 41 ) — 70 57 Balance at September 25, 2020 20,327 ( 6,821 ) $ 257,019 $ 625,371 $ ( 199,185 ) $ ( 42,781 ) $ 3,748 $ 644,172 6 Common Shares Shareholders' Equity (Thousands, except per share amounts) Common Shares Common Shares Held in Treasury Common Stock Retained Earnings* Common Stock in Treasury Accumulated Other Comprehensive Loss Other Equity Total* 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 Balance at December 31, 2019 20,404 ( 6,744 ) $ 249,674 $ 624,954 $ ( 186,845 ) $ ( 45,462 ) $ 3,422 $ 645,743 Net income — — — 7,396 — — — 7,396 Other comprehensive loss — — — — — 2,681 — 2,681 Cash dividends declared ($ 0.34 per share) — — — ( 6,920 ) — — — ( 6,920 ) Stock-based compensation activity 117 117 7,272 ( 59 ) ( 3,133 ) — — 4,080 Payments of withholding taxes for stock-based compensation awards ( 39 ) ( 39 ) — — ( 2,212 ) — — ( 2,212 ) Repurchase of shares ( 158 ) ( 158 ) — — ( 6,766 ) — — ( 6,766 ) Directors’ deferred compensation 3 3 73 — ( 229 ) — 326 170 Balance at September 25, 2020 20,327 ( 6,821 ) $ 257,019 $ 625,371 $ ( 199,185 ) $ ( 42,781 ) $ 3,748 $ 644,172 * Amounts for the periods ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K. See notes to these consolidated financial statements. 7 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. Certain amounts in prior periods have been reclassified to conform to the 2021 consolidated financial statement presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2020 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. Change in Accounting Principle: During the fourth quarter of 2020, the Company elected to change its method for valuing its inventories at locations that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company believes that the FIFO method is preferable as it improves comparability with its most similar peers, it more closely resembles the physical flow of its inventory (i.e., it provides better matching of revenues and expenses), and it results in uniformity across a significant majority of the Company’s inventory. The effects of the change in accounting principle from LIFO to FIFO were retrospectively applied. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheet as of September 25, 2020 and the consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three and nine months ended September 25, 2020 were adjusted as necessary. For further information, refer to the Company's 2020 Annual Report on Form 10-K. 8 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements: Consolidated Statement of Income (Thousands except per share amounts) Third Quarter Ended Nine Months Ended September 25, 2020 September 25, 2020 Selected Items As Reported As Adjusted Adjustment As Reported As Adjusted Adjustment Cost of sales $ 240,531 $ 241,860 $ 1,329 $ 696,280 $ 699,749 $ 3,469 Gross margin 46,640 45,311 ( 1,329 ) 140,305 136,836 ( 3,469 ) Operating profit (loss) 713 ( 616 ) ( 1,329 ) 4,856 1,387 ( 3,469 ) Income (Loss) before income taxes 455 ( 874 ) ( 1,329 ) 4,888 1,419 ( 3,469 ) Income tax benefit ( 6,041 ) ( 6,345 ) ( 304 ) ( 5,183 ) ( 5,977 ) ( 794 ) Net income 6,496 5,471 ( 1,025 ) 10,071 7,396 ( 2,675 ) Basic earnings per share: Net income per share of common stock $ 0.32 $ 0.27 $ ( 0.05 ) $ 0.50 $ 0.36 $ ( 0.14 ) Diluted earnings per share: Net income per share of common stock $ 0.32 $ 0.27 $ ( 0.05 ) $ 0.49 $ 0.36 $ ( 0.13 ) Consolidated Statement of Comprehensive Income (Thousands) Third Quarter Ended Nine Months Ended September 25, 2020 September 25, 2020 Selected Items As Reported As Adjusted Adjustment As Reported As Adjusted Adjustment Net income $ 6,496 $ 5,471 $ ( 1,025 ) $ 10,071 $ 7,396 $ ( 2,675 ) Comprehensive income 9,286 8,261 ( 1,025 ) 12,752 10,077 ( 2,675 ) Consolidated Statement of Cash Flows (Thousands) Nine Months Ended September 25, 2020 Selected Items As Reported As Adjusted Adjustment Net income $ 10,071 $ 7,396 $ ( 2,675 ) Deferred income tax benefit ( 5,187 ) ( 5,981 ) ( 794 ) Increase in inventory ( 9,883 ) ( 6,414 ) 3,469 New Pronouncements Adopted: In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes by removing various exceptions, such as the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments in this update also simplify the accounting for income taxes related to income-based franchise taxes and require that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted the standard on January 1, 2021. The adoption did not materially impact the Company's financial statements or disclosures. New Accounting Guidance Issued and Not Yet 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 9 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 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. The Company is currently assessing which of its various contracts will require an update for a new reference rate, and will determine the timing for implementation of this guidance at the completion of that analysis. No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity. Note B — Acquisition Business acquisitions have been accounted for using the acquisition method, with acquired assets and assumed liabilities recognized at their respective fair values as of the acquisition date. The cost in excess of the net assets of the business acquired is included in goodwill. On July 17, 2020, the Company completed the acquisition of Optics Balzers AG (Optics Balzers), an industry leader in thin film optical coatings. The purchase price for Optics Balzers was $ 136.1 million, including the assumption of $ 22.5 million of debt. The transaction was funded with cash on hand. Based on the fair value of assets acquired and liabilities assumed, goodwill of $ 70.8 million and identifiable intangible assets of $ 49.3 million were recorded. Goodwill associated with this acquisition is not tax deductible. This acquisition is being reported in the Company's Precision Optics segment and the results of Optics Balzers are not material to the Company's Consolidated Financial Statements. No material measurement period adjustments have been recorded during the third quarter or first nine months of 2021, and as of October 1, 2021, the purchase price allocation is complete. Note C — Segment Reporting The Company has the following reportable segments: Performance Alloys and Composites, Advanced 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 Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, and beryllia ceramics. Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature, and braze materials. Precision Optics produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials. The Other reportable segment includes unallocated corporate costs and assets. 10 (Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Other Total Third Quarter 2021 Net sales $ 136,096 $ 220,723 $ 31,209 $ — $ 388,028 Intersegment sales 32 3,036 — — 3,068 Operating profit (loss) 20,928 9,281 3,329 ( 12,378 ) 21,160 Third Quarter 2020 Net sales $ 91,203 $ 165,582 $ 30,386 $ — $ 287,171 Intersegment sales — 6,602 — — 6,602 Operating (loss) profit ( 437 ) 5,749 1,421 ( 7,349 ) ( 616 ) First Nine Months 2021 Net sales $ 375,533 $ 638,481 $ 99,399 $ — $ 1,113,413 Intersegment sales 47 8,908 — — 8,955 Operating profit (loss) 51,733 26,547 10,513 ( 27,192 ) 61,601 First Nine Months 2020 Net sales $ 291,884 $ 475,855 $ 68,846 $ — $ 836,585 Intersegment sales 2 24,790 — — 24,792 Operating profit (loss) 9,910 15,452 ( 6,080 ) ( 17,895 ) 1,387 11 The following table disaggregates revenue for each segment by end market for the third quarter and first nine months of 2021 and 2020: (Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Other Total 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 5,652 — 26,403 Consumer electronics 9,717 530 7,788 — 18,035 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 6,272 — 32,984 Total $ 136,096 $ 220,723 $ 31,209 $ — $ 388,028 Third Quarter 2020 End Market Semiconductor $ 983 $ 131,380 $ 1,008 $ — $ 133,371 Industrial 21,630 9,967 4,976 — 36,573 Aerospace and defense 14,740 1,687 4,867 — 21,294 Consumer electronics 11,074 78 6,550 — 17,702 Automotive 14,077 1,477 1,059 — 16,613 Energy 5,825 16,693 — — 22,518 Telecom and data center 10,452 500 — — 10,952 Other 12,422 3,800 11,926 — 28,148 Total $ 91,203 $ 165,582 $ 30,386 $ — $ 287,171 12 (Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Other Total First Nine Months 2021 End Market Semiconductor $ 5,966 $ 495,718 $ 1,664 $ — $ 503,348 Industrial 85,815 33,756 23,305 — 142,876 Aerospace and defense 60,221 4,680 17,825 — 82,726 Consumer electronics 30,483 961 24,212 — 55,656 Automotive 78,195 5,145 6,871 — 90,211 Energy 16,541 78,487 — — 95,028 Telecom and data center 39,348 140 — — 39,488 Other 58,964 19,594 25,522 — 104,080 Total $ 375,533 $ 638,481 $ 99,399 $ — $ 1,113,413 First Nine Months 2020 End Market Semiconductor $ 3,426 $ 376,107 $ 1,251 $ — $ 380,784 Industrial 68,801 26,748 10,647 — 106,196 Aerospace and defense 46,898 4,764 14,095 — 65,757 Consumer electronics 35,725 216 13,496 — 49,437 Automotive 48,656 4,743 1,083 — 54,482 Energy 16,844 49,488 — — 66,332 Telecom and data center 33,027 2,158 — — 35,185 Other 38,507 11,631 28,274 — 78,412 Total $ 291,884 $ 475,855 $ 68,846 $ — $ 836,585 Intersegment sales are eliminated in consolidation. Note D — Revenue Recognition Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue, in an amount that reflects the consideration to which it expects to be entitled, upon satisfaction of a performance obligation, by transferring control over a product to the customer. Control over the product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product. Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification 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 October 1, 2021. 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 October 1, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 81.0 million. 13 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) October 1, 2021 December 31, 2020 $ change % change Accounts receivable, trade $ 176,766 $ 156,821 $ 19,945 13 % Unbilled receivables 12,450 8,832 3,618 41 % Unearned revenue 8,308 7,713 595 8 % Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred relating to our receivables were immaterial during the first nine months of 2021. Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are generally billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables. Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately $ 5.6 million of the December 31, 2020 unearned amounts as revenue during the first nine months of 2021. As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less. The Company does not include extended payment terms in its contracts with customers. Note E — Other-net Other-net for the third quarter and first nine months of 2021 and 2020 is summarized as follows: Third Quarter Ended Nine Months Ended October 1, September 25, October 1, September 25, (Thousands) 2021 2020 2021 2020 Metal consignment fees $ 2,243 $ 2,317 $ 6,857 $ 6,583 Amortization of intangible assets 1,283 907 3,461 1,201 Foreign currency loss (gain) 380 ( 1,029 ) 1,596 ( 3,577 ) Net loss (gain) on disposal of fixed assets 81 19 ( 283 ) 74 Other items ( 383 ) 7 641 ( 138 ) Total $ 3,604 $ 2,221 $ 12,272 $ 4,143 Note F — Restructuring During 2020, the Company determined it would close its Large Area Coatings (LAC) business (a reporting unit in the Precision Optics segment). The closure was substantially completed by the end of the first quarter of 2021. Income of $ 0.4 million was recorded in the first quarter of 2021, primarily related to lower than previously estimated facility closure costs that were recorded in 2020. Remaining severance payments are immaterial and reflected in Salaries and wages in the Consolidated Balance Sheet as of October 1, 2021. Any additional costs related to the closure of this business are expected to be immaterial. 14 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) In addition, during 2020, the Company initiated a restructuring plan in its Performance Alloys and Composites segment to close its Warren, Michigan and Fremont, California locations. Costs associated with the plan totaled $ 2.2 million and $ 6.8 million in the third quarter and first nine months of 2020, respectively. In the third quarter of 2020, these costs included $ 0.4 million of severance and $ 1.6 million of facility and other related costs. Included in restructuring charges for the first nine months of 2020 was $ 1.8 million of severance associated with approximately 60 employees and $ 4.4 million of facility and other related costs. Note G — Income Taxes The Company's effective tax rate for the third quarter of 2021 and 2020 was 15.9 % and 726.0 %, respectively, and 16.1 % and ( 421.2 )% in the first nine months of 2021 and 2020, respectively. The effective tax rate for each period in 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits, and the foreign derived intangible income deduction. The effective tax rate for the third quarter of 2020 was higher than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on a loss for the period. The effective tax rate for the first nine months of 2020 was lower than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on income for the period. The effective tax rate for the first nine months of 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. The effective tax rate for the first nine months of 2020 included a net discrete income tax benefit of $ 3.8 million, primarily related to the release of a valuation allowance. Given the Company’s recent history of foreign earnings, management believes that there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance recorded against the deferred tax assets held by its German subsidiaries will be reversed. The reversal would result in an income tax benefit for the quarterly and annual period in which the Company releases the valuation allowance. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company actually achieves. On March 11, 2021, President Biden signed the American Rescue Plan (the Rescue Plan) into law. The Rescue Plan, among other things, extends and enhances a number of current-law tax incentives for businesses. While the Company continues to examine the impacts the Rescue Plan may have on its business, it does not expect it will have a material impact to its consolidated financial statements. 15 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note H — Earnings Per Share (EPS) The following table sets forth the computation of basic and diluted EPS: Third Quarter Ended Nine Months Ended October 1, September 25, October 1, September 25, (Thousands, except per share amounts) 2021 2020 2021 2020 Numerator for basic and diluted EPS: Net income $ 18,156 $ 5,471 $ 52,791 $ 7,396 Denominator: Denominator for basic EPS: Weighted-average shares outstanding 20,439 20,325 20,414 20,342 Effect of dilutive securities: Stock appreciation rights 72 46 73 39 Restricted stock units 94 77 113 90 Performance-based restricted stock units 52 144 59 124 Diluted potential common shares 218 267 245 253 Denominator for diluted EPS: Adjusted weighted-average shares outstanding 20,657 20,592 20,659 20,595 Basic EPS $ 0.89 $ 0.27 $ 2.59 $ 0.36 Diluted EPS $ 0.88 $ 0.27 $ 2.56 $ 0.36 Adjusted weighted-average shares outstanding - diluted exclude securities totaling 55,598 and 114,335 for the quarters ended October 1, 2021 and September 25, 2020, respectively and 56,319 and 164,447 for the nine months ended October 1, 2021 and September 25, 2020, 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 I — Inventories Inventories on the Consolidated Balance Sheets are summarized as follows: October 1, December 31, (Thousands) 2021 2020 Raw materials and supplies $ 79,937 $ 42,905 Work in process 179,616 156,093 Finished goods 52,192 51,780 Inventories, net $ 311,745 $ 250,778 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 price movements and to reduce its working capital investment. The notional value of off-balance sheet precious metals and copper was $ 452.9 million and $ 400.0 million as of October 1, 2021 and December 31, 2020, respectively. Amounts for the year ended December 31, 2020 have been revised to reflect a $ 44.6 million reclassification out of work in process and into finished goods inventory. 16 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note J — Customer Prepayments The Company entered into investment and master supply agreements with a customer to procure equipment to manufacture product for the customer. The customer is providing prepayments to the Company in the amount of approximately $ 70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer. The Company will own the equipment and be responsible for operating and maintenance costs. The prepayment from the customer will be applied when commercial production of the product is sold and delivered to the customer in connection with a master supply agreement. Accordingly, as of October 1, 2021 and December 31, 2020, $ 67.9 million and $ 58.8 million, respectively, of prepayments were classified as Unearned income in the Consolidated Balance Sheet, of which $ 1.0 million and $ 9.0 million, respectively, was received during the third quarter and first nine months of 2021. Note K — Pensions and Other Post-employment Benefits The following is a summary of the net periodic benefit credit for the third quarter and first nine months of 2021 and 2020 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan. Pension Benefits Other Benefits Third Quarter Ended Third Quarter Ended October 1, September 25, October 1, September 25, (Thousands) 2021 2020 2021 2020 Components of net periodic benefit (credit) cost Service cost $ — $ — $ 20 $ 14 Interest cost 986 1,215 29 53 Expected return on plan assets ( 2,234 ) ( 2,206 ) — — Amortization of prior service cost (benefit) — — ( 374 ) ( 374 ) Amortization of net loss (gain) 418 284 ( 69 ) ( 83 ) Total net benefit (credit) cost $ ( 830 ) $ ( 707 ) $ ( 394 ) $ ( 390 ) Pension Benefits Other Benefits Nine Months Ended Nine Months Ended October 1, September 25, October 1, September 25, (Thousands) 2021 2020 2021 2020 Components of net periodic benefit (credit) cost Service cost $ — $ — $ 60 $ 45 Interest cost 2,959 3,644 87 160 Expected return on plan assets ( 6,702 ) ( 6,616 ) — — Amortization of prior service cost (benefit) — — ( 1,123 ) ( 1,123 ) Amortization of net loss (gain) 1,253 852 ( 206 ) ( 249 ) Net periodic benefit (credit) cost $ ( 2,490 ) $ ( 2,120 ) $ ( 1,182 ) $ ( 1,167 ) Settlements — 94 — — Total net benefit (credit) cost $ ( 2,490 ) $ ( 2,026 ) $ ( 1,182 ) $ ( 1,167 ) The Company did no t make any contributions to its domestic defined benefit plan in the third quarter or first nine months of 2021 or 2020. The Company reports the service cost component of net periodic benefit credit in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit credit in Other non-operating (income) expense. In May 2019, the Company's Board of Directors approved changes to the U.S. defined benefit pension plan. The Company 17 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) froze the pay and service amounts used to calculate pension benefits for active participants in the pension plan as of January 1, 2020. Note L — 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 2021 and 2020 are as follows: Gains and Losses on Cash Flow Hedges (Thousands) Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total Balance at July 2, 2021 $ 1,603 $ 186 $ — $ 1,789 $ ( 43,226 ) $ ( 1,647 ) $ ( 43,084 ) Other comprehensive income (loss) before reclassifications 625 30 8 663 — ( 2,029 ) ( 1,366 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 2 ) ( 83 ) ( 8 ) ( 93 ) 114 — 21 Net current period other comprehensive (loss) income before tax 623 ( 53 ) — 570 114 ( 2,029 ) ( 1,345 ) Deferred taxes 143 ( 12 ) — 131 ( 7 ) — 124 Net current period other comprehensive (loss) income after tax 480 ( 41 ) — 439 121 ( 2,029 ) ( 1,469 ) Balance at October 1, 2021 $ 2,083 $ 145 $ — $ 2,228 $ ( 43,105 ) $ ( 3,676 ) $ ( 44,553 ) Balance at June 26, 2020 $ 1,065 $ ( 779 ) $ 104 $ 390 $ ( 41,241 ) $ ( 4,720 ) $ ( 45,571 ) Other comprehensive (loss) income before reclassifications ( 520 ) ( 617 ) 182 ( 955 ) — 3,076 2,121 Amounts reclassified from accumulated other comprehensive income (loss) 191 710 ( 353 ) 548 ( 11 ) — 537 Net current period other comprehensive (loss) income before tax ( 329 ) 93 ( 171 ) ( 407 ) ( 11 ) 3,076 2,658 Deferred taxes ( 76 ) 22 ( 38 ) ( 92 ) ( 40 ) — ( 132 ) Net current period other comprehensive (loss) income after tax ( 253 ) 71 ( 133 ) ( 315 ) 29 3,076 2,790 Balance at September 25, 2020 $ 812 $ ( 708 ) $ ( 29 ) $ 75 $ ( 41,212 ) $ ( 1,644 ) $ ( 42,781 ) 18 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Gains and Losses on Cash Flow Hedges (Thousands) Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total Balance at December 31, 2020 $ 519 $ ( 170 ) $ 468 $ 817 $ ( 43,473 ) $ 4,017 $ ( 38,639 ) Other comprehensive income (loss) before reclassifications 1,893 532 2,444 4,869 — ( 7,693 ) ( 2,824 ) Amounts reclassified from accumulated other comprehensive income (loss) 138 ( 122 ) ( 3,049 ) ( 3,033 ) 348 — ( 2,685 ) Net current period other comprehensive (loss) income before tax 2,031 410 ( 605 ) 1,836 348 ( 7,693 ) ( 5,509 ) Deferred taxes 467 95 ( 137 ) 425 ( 20 ) — 405 Net current period other comprehensive (loss) income after tax 1,564 315 ( 468 ) 1,411 368 ( 7,693 ) ( 5,914 ) Balance at October 1, 2021 $ 2,083 $ 145 $ — $ 2,228 $ ( 43,105 ) $ ( 3,676 ) $ ( 44,553 ) Balance at December 31, 2019 $ 1,324 $ ( 452 ) $ 25 $ 897 $ ( 41,346 ) $ ( 5,013 ) $ ( 45,462 ) Other comprehensive (loss) income before reclassifications ( 863 ) ( 1,851 ) ( 170 ) ( 2,884 ) — 3,369 485 Amounts reclassified from accumulated other comprehensive income (loss) 198 1,519 100 1,817 34 — 1,851 Net current period other comprehensive (loss) income before tax ( 665 ) ( 332 ) ( 70 ) ( 1,067 ) 34 3,369 2,336 Deferred taxes ( 153 ) ( 76 ) ( 16 ) ( 245 ) ( 100 ) — ( 345 ) Net current period other comprehensive (loss) income after tax ( 512 ) ( 256 ) ( 54 ) ( 822 ) 134 3,369 2,681 Balance at September 25, 2020 $ 812 $ ( 708 ) $ ( 29 ) $ 75 $ ( 41,212 ) $ ( 1,644 ) $ ( 42,781 ) 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. Refer to Note O for additional details on cash flow hedges. Reclassifications from accumulated other comprehensive income (loss) for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note K for additional details on pension and post-employment expenses. 19 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note M — Stock-based Compensation Expense Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 1.5 million and $ 5.3 million in the third quarter and first nine months of 2021, respectively, compared to less than $ 0.1 million and $ 4.1 million, respectively, in the same periods of 2020. The Company granted 52,709 stock appreciation rights (SARs) to certain employees during the first nine months of 2021. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the nine months ended October 1, 2021 were $ 68.82 and $ 20.66 , 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 0.57 % Dividend yield 0.7 % Volatility 37.6 % Expected term (in years) 4.6 The Company granted 59,818 stock-settled restricted stock units (RSUs) to certain employees and 9,904 to non-employee directors during the first nine months of 2021. 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 $ 68.62 and $ 75.77 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the nine months ended October 1, 2021. RSUs are generally expensed over the vesting period of three years for employees and one year for non-employee directors. The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first nine months of 2021. The weighted-average fair value of the stock-settled PRSUs was $ 83.78 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 October 1, 2021, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately $ 10.9 million, and is expected to be recognized over the remaining vesting period of the respective grants. Note N — 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. 20 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 October 1, 2021 and December 31, 2020: (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) 2021 2020 2021 2020 2021 2020 2021 2020 Financial Assets Deferred compensation investments $ 3,994 $ 3,802 $ 3,994 $ 3,802 $ — $ — $ — $ — Foreign currency forward contracts 1,800 107 — — 1,800 107 — — Precious metal swaps 237 127 — — 237 127 — — Copper swaps — 632 — — — 632 — — Total $ 6,031 $ 4,668 $ 3,994 $ 3,802 $ 2,037 $ 866 $ — $ — Financial Liabilities Deferred compensation liability $ 3,994 $ 3,802 $ 3,994 $ 3,802 $ — $ — $ — $ — Foreign currency forward contracts 128 1,203 — — 128 1,203 — — Precious metal swaps 49 349 — — 49 349 — — Copper swaps — 27 — — — 27 — — Total $ 4,171 $ 5,381 $ 3,994 $ 3,802 $ 177 $ 1,579 $ — $ — The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of October 1, 2021 and December 31, 2020. 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 O — Derivative Instruments and Hedging Activity The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows: Foreign Currency. The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar. The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but 21 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk. The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and 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 precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions that charge the Company a financing fee based upon the current value of the metal on hand. In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced. The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine. In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment. The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure. The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned. Copper. The Company also uses copper in its production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period. To mitigate this impact, the Company hedges a portion of this pricing risk. The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held 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. 22 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates. The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of October 1, 2021 and December 31, 2020: October 1, 2021 December 31, 2020 (Thousands) Notional Amount Fair Value Notional Amount Fair Value Foreign currency forward contracts Prepaid expenses $ 58,289 $ 914 $ 62,012 $ 107 Other liabilities and accrued items 17,735 125 7,695 55 These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included $ 0.7 million of foreign currency gains in the third quarter of 2021 and $ 0.5 million of foreign currency losses related to derivatives in the first nine months of 2021, compared to $ 0.4 million and $ 2.7 million of foreign currency gains in the third quarter and first nine months of 2020, respectively. The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of October 1, 2021 and December 31, 2020: October 1, 2021 December 31, 2020 (Thousands) Notional Amount Fair Value Notional Amount Fair Value Prepaid expenses Foreign currency forward contracts - yen $ 4,786 $ 109 $ — $ — Foreign currency forward contracts - euro 27,028 720 — — Precious metal swaps 4,447 225 2,155 127 Copper swaps — — 6,225 632 Total 36,261 1,054 8,380 759 Other assets Foreign currency forward contracts - yen 327 1 — — Foreign currency forward contracts - euro 3,567 56 — — Precious metal swaps 541 12 — — Total 4,435 69 — — Other liabilities and accrued items Foreign currency forward contracts - yen 606 3 2,668 59 Foreign currency forward contracts - euro — — 17,611 1,089 Precious metal swaps 870 49 4,964 349 Copper swaps — — 2,445 27 Total 1,476 52 27,688 1,524 Total $ 42,172 $ 1,071 $ 36,068 $ 765 23 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) All of these contracts were designated and effective as cash flow hedges. The Company expects to relieve substantially the entire balance in OCI as of October 1, 2021 to the Consolidated Statements of Income within the next 15-months. Refer to Note L for additional OCI details. The following table summarizes the pre-tax amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification as of the third quarter and first nine months of 2021 and 2020: Third Quarter Ended (Thousands) October 2, 2021 September 25, 2020 Hedging relationship Line item Foreign currency forward contracts Net sales $ ( 2 ) $ 191 Precious metal swaps Cost of sales ( 83 ) 710 Copper swaps Cost of sales ( 8 ) ( 353 ) Total $ ( 93 ) $ 548 Nine Months Ended (Thousands) October 1, 2021 September 25, 2020 Hedging relationship Line item Foreign currency forward contracts Net sales $ 138 $ 198 Precious metal swaps Cost of sales ( 122 ) 1,519 Copper swaps Cost of sales ( 3,049 ) 100 Total $ ( 3,033 ) $ 1,817 Note P — Contingencies Legal Proceedings . For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims , refer to Note T ("Contingencies and Commitments") in the Company's 2020 Annual Report on Form 10-K. Two beryllium cases were outstanding as of October 1, 2021. The Company does not expect the resolution of these matters to have a material impact on the consolidated financial statements. Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. 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. The case is currently in the preliminary stages. The Company believes that it has substantive defenses and intends to vigorously defend this suit. 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 24 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 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 $ 4.9 million and $ 5.5 million at October 1, 2021 and December 31, 2020, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded. Note Q — Debt (Thousands) October 1, 2021 December 31, 2020 Borrowings under Credit Agreement $ 77,010 $ 34,000 Foreign debt 2,555 3,157 Fixed rate industrial development revenue bonds — 1,322 Total debt outstanding 79,565 38,479 Current portion of long-term debt ( 529 ) ( 1,937 ) Long-term debt $ 79,036 $ 36,542 As of October 1, 2021 and December 31, 2020, the Company had $ 77.0 million and $ 34.0 million, respectively, outstanding against its revolving credit facility (Credit Agreement) with average interest rates of 1.51 % and 1.65 % at October 1, 2021 and December 31, 2020, respectively. The remaining borrowing capacity under the revolving credit facility as of October 1, 2021 and December 31, 2020 wa s $ 319.4 million and $ 245.8 million, respectively. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2024. The Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all of its debt covenants as of October 1, 2021. At October 1, 2021 and December 31, 2020, there was $ 47.3 million and $ 48.1 million outstanding against the letters of credit sub-facility, respectively. Note R — Subsequent Event On September 19, 2021, the Company entered into a definitive agreement under which it has agreed to acquire the industry-leading electronic materials business of H.C. Starck (HCS) for a purchase price of approximately $ 380 million in cash, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism. Acquisition-related transaction and integration costs totaled $ 5.3 million in the third quarter of 2021. These costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income. On November 1, 2021, the Company completed the acquisition. The Company financed the purchase price for the HCS acquisition with a new $ 300 million five-year term loan pursuant to a delayed draw term loan facility entered during October 2021 and $ 103 million of borrowings under its amended revolving credit facility, which was also extended to expire five years in October 2026. The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio.