What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-18 · 171 added, 128 removed, 283 unchanged (51% of the section changed)

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Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center.

Coronavirus (COVID-19) Update

The significant macroeconomic impact of the ongoing COVID-19 pandemic impacted several of our markets beginning in the first quarter of 2020 primarily in the form of reduced demand, particularly in the consumer electronics, automotive, energy, aerospace and defense, and industrial end markets.

During 2020, we recorded additional reserves for slow-moving and excess inventory of approximately $1.3 million related to the collapse in demand in the oil and gas industry.

We also reviewed for any other potential impairment indicators and did not identify any.

We still may temporarily shut down our facilities in response to reduced demand, due to employees being impacted by COVID-19, or changes in government policy.

We are not experiencing any significant supply chain disruptions.

We expect reduced demand to continue at least through the first quarter of 2021, but the extent and timing cannot be reasonably estimated due to the evolving nature of this pandemic.

In 2020, the Company incurred $4.1 million of expense primarily related to premium pay for production workers who were deemed essential to work onsite during the pandemic, as well as for personal protective equipment and temperature-checking services.

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

The Company suspended its share buyback program in the first quarter of 2020.

The Company subsequently decided to lift the suspension of its share buyback program in the fourth quarter of 2020.

In addition, the Company has evaluated the impact of the CARES Act and has determined it does not have a material impact to its consolidated financial statements.

See Note H to the Consolidated Financial Statements for additional discussion.

From a liquidity perspective, we believe we are well positioned to manage through this global crisis.

In order to ensure we have more than adequate liquidity, we borrowed $150.0 million under the revolving credit facility in April 2020, $116.0 million of which was repaid during the second half of 2020.

We ended 2020 with total cash of $25.9 million and $38.5 million of total debt, or in a net debt position of $12.6 million.

In addition, we had $245.8 million of available borrowings under our revolving credit facility as of December 31, 2020.

Additionally, in July 2020, we completed the acquisition of Optics Balzers for a purchase price of $136.1 million, including the assumption of debt.

The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility during the second quarter of 2020.

COVID-19 Update

In March 2020, the W orld Health O r ganization 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 estima t es.

Management continues to manage global macroeconomic impacts on supply chains, inflationary costs, and labor availability and costs, all of which impacted the Company throughout 2021.

HCS-Electronic Materials Acquisition

On September 19, 2021, the Company entered into a definitive agreement under which it has agreed to acquire HCS-Electronic Materials from H.C.

Starck Group GmbH for a purchase price of approximately $ 395.9 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 Statement of Income.

On November 1, 2021, the Company completed the acquisition.

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 entered into 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.

RESULTS OF OPERATIONS

During the fourth quarter of 2020, we elected to change our method for valuing inventories that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.

Total inventories accounted for under the LIFO method represented approximately 45% of the Company's total inventories as of December 31, 2019 prior to this change in method.

We determined that the FIFO method is preferable as it results in uniformity across materially all of our global operations, more closely resembles the physical flow of our inventory, and improves comparability with our peers.

The effects of the change in accounting principle have been retrospectively applied to all periods presented in Item 7.

Refer to “Note A - Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.

(Thousands except per share data) 2021 2020 2019

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Selling, general, and administrative (SG&A) expense 163,777 133,963 147,164

133,963 147,164 153,489

SG&A expense as a % of Value-added sales 19 % 20 % 20 %

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Income before income taxes 77,325 8,275 65,536

Income tax (benefit) expense (7,187) 12,142 (4,446)

Income tax expense (benefit) 4,851 (7,187) 12,142

Net income 72,474 15,462 53,394

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2021 Compared to 2020

Net sales of $1,176.3 million in 2020 decreased $9.1 million from $1,185.4 million in 2019.

Increased net sales of $97.1 million in our Advanced Materials segment were more than offset by decreased net sales of $106.0 million and $0.2 million in our Performance Alloys and Composites and Precision Optics segments, respectively, driven by lower sales volumes.

Net sales of $1,510.6 million in 2021 increased $334.3 million from $1,176.3 million in 2020.

Each segment recorded strong increases in sales when compared to the prior year, as sales in Performance Alloys and Composites grew 30%, sales in Advanced Materials grew 29% and sales in Precision Optics grew 19%.

Strong market demand and our ability to capitalize on new business opportunities drove most of the increase.

The change in precious metal and copper prices favorably impacted net sales during 2021 by $47.4 million.

Sales in 2021 also included a full year of Optics Balzers sales and two months of HCS-Electronic Materials sales as compared to five and a half months of Optics Balzers sales in 2020.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices and changes in mix due to customer-supplied material.

Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein.

Value-added sales of $678.6 million in 2020 were down 8% compared to 2019.

The increase in semiconductor end market value-added sales was more than offset by the decrease in value-added sales due to reduced demand in the aerospace and defense, energy, telecom and data center, and industrial end markets.

Gross margin was $192.6 million in 2020, or a 27% decrease from the $262.7 million gross margin recorded in 2019.

Gross margin expressed as a percentage of value-added sales decreased to 28% in 2020 from 36% in 2019.

The decrease was primarily driven by lower volumes, as well as $12.9 million of mine development costs relating to a recent mine expansion, $3.8 million of costs related to the COVID-19 pandemic, and a $1.3 million charge to reserves for slow-moving and excess inventory related to the collapse in demand in the oil and gas industry, all of which were recorded in 2020.

Value-added sales of $859.7 million in 2021 were up 29% compared to 2020.

The increase was due to strong demand across all of our markets and our ability to capitalize on new business opportunities.

Gross margin was $283.8 million in 2021, a 47% increase from the $192.6 million gross margin recorded in 2020.

Gross margin expressed as a percentage of value-added sales increased to 33% in 2021 from 29% in 2020.

The increase was primarily driven by strong product demand across all of our manufacturing sites as core markets rebounded in 2021 and the Company's strong operating performance.

SG&A expense totaled $163.8 million in 2021 as compared to $134.0 million in 2020.

The decrease in SG&A expense for 2020 was primarily driven by lower variable compensation expense and cost management actions, partially offset by integration and transaction costs related to the Optics Balzers acquisition.

Expressed as a percentage of value-added sales, SG&A expense was 20% in both 2020 and 2019.

The increase in SG&A expense for 2021 was primarily driven by the Optics Balzers and HCS-Electronic Materials additions, related transaction and integration costs from the HCS-Electronic Materials acquisition and higher variable compensation costs based on the strong 2021 operating performance.

Expressed as a percentage of value-added sales, SG&A expense decreased 100 basis points in 2021 to 19% compared to 20% in 2020.

R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications.

R&D expense was $20.3 million, an increase of 11% compared to 2019 and increased to 3% as a percentage of value-added sales in 2020.

The increase in R&D expense reflects additional investment in new product and application development.

Goodwill and Asset impairment charges includes non-recurring charges relating to goodwill and other assets in our Precision Optics segment.

Refer to Note N to the Consolidated Financial Statements for additional discussion.

R&D expense was $26.6 million in 2021, an increase of 31% compared to 2020.

R&D costs as a percentage of value-added sales remained at 3%.

The increase in R&D expense reflects the full-year impact of the Optics Balzers acquisition and the additional investment in new product and application development.

Goodwill and Asset impairment charges were $0 in 2021.

Refer to Note N to the Consolidated Financial Statements for additional discussion regarding 2020.

Restructuring expense consists primarily of cost reduction actions taken in order to improve the efficiency of our operations.

In 2020, we recorded $11.2 million of restructuring charges.

Of this amount, $8.8 million relates to the closure of our Warren, Michigan and Fremont, California facilities in our Performance Alloys and Composites segment and $1.7 million relates to the closure of our Large Area Coatings (LAC) business in our Precision Optics segment.

In 2019, we recorded $0.8 million of expenses related to restructuring actions taken in our LAC business and our Other segment.

We incurred no material restructuring costs in 2021.

All 2021 activity was related to final resolution of 2020 accrual balances that were remaining from the restructuring actions taken in 2020 when we recorded $11.2 million of restructuring charges associated with the permanent closure of our Warren, Michigan and Fremont, California facilities in our Performance Alloys and Composites segment and the closure of our Large Area Coatings (LAC) business in our Precision Optics segment.

Refer to Note E to the Consolidated Financial Statements for additional discussion.

Other-net totaled expense of $16.7 million and $8.5 million in 2021 and 2020, respectively.

The decrease in Other-net was primarily driven by a $3.3 million foreign exchange hedge gain realized in 2020.

The increase in Other-net was driven by an increase in acquisition amortization due to the acquisition of HCS-Electronic Materials in the fourth quarter of 2021 and a full year of amortization from the Optics Balzers acquisition plus $3.3 million foreign exchange hedge gain realized in 2020 that did not reoccur in 2021.

Refer to Note F to the Consolidated Financial Statements for the major components within Other-net.

Other non-operating (income) expense-net includes components of pension and post-retirement expense other than service costs.

In 2019, other non-operating (income) expense-net included a non-cash pre-tax pension curtailment charge of $3.3 million associated with the pension plan amendment to freeze the pay and service amounts used to calculate pension benefits effective January 1, 2020.

Refer to Note P of the Consolidated Financial Statements for details of the components of net periodic benefit costs.

Interest expense - net was $4.9 million in 2021 and $3.9 million in 2020.

The increase in interest expense in 2020 compared to 2019 is primarily due to increased borrowings under our revolving credit facility.

Income tax (benefit) expense for 2020 was a benefit of $7.2 million compared to $12.1 million of expense in 2019.

The effects of percentage depletion, the research and development credit, and the release of a valuation allowance in a foreign jurisdiction were the primary factors for the difference between the effective and statutory tax rates in 2020.

The increase in interest expense in 2021 compared to 2020 is primarily due to borrowings under our new term loan facility and increased borrowings under the revolving credit facility during the fourth quarter of 2021 as a result of funding the HCS-Electronic Materials acquisition.

Income tax expense (benefit) for 2021 was $4.9 million of expense compared to $7.2 million of benefit in 2020.

The effects of percentage depletion, foreign derived intangible income deduction, and the release of a valuation allowance in a foreign jurisdiction were the primary factors for the difference between the effective and statutory tax rates in 2021.

Refer to Note H to the Consolidated Financial Statements for further details on income taxes.

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Segment Disclosures

The Company consists of four reportable segments:

The Company has four reportable segments:

Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other.

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2021 Compared to 2020

Net sales from the Performance Alloys and Composites segment of $394.2 million in 2020 decreased 21% compared to 2019.

The decrease was due to reduced sales into all major end markets, with the largest declines in the aerospace and defense, energy, telecom and data center, and industrial end markets.

Value-added sales of $345.3 million in 2020 were 19% lower than value-added sales of $428.1 million in 2019.

The decrease in value-added sales was due to the same factors driving the decrease in net sales.

Net sales from the Performance Alloys and Composites segment of $511.9 million in 2021 increased 30% compared to 2020.

The increase was due to higher sales into all major end markets, the largest of which were in the industrial, automotive, aerospace & defense and other end markets.

Value-added sales of $440.4 million in 2021 were 28% higher than value-added sales of $345.3 million in 2020.

The increase in value-added sales was driven by the same factors driving the increase in net sales.

Performance Alloys and Composites generated operating profit of $67.9 million, or 15.4% of value-added sales, in 2021 as compared to $13.6 million, or 4% of value-added sales, in 2020.

The decrease in operating profit was primarily due to reduced sales volumes, as well as $12.9 million of mine development costs recorded in 2020.

In addition, restructuring charges of $8.8 million were recorded in 2020 related to the closure of our Warren, Michigan and Fremont, California facilities.

The increase in operating profit was primarily due to increased sales volume, and no mine development costs in 2021 compared to $12.9 million of mine development costs recorded in 2020.

In addition, there were no restructuring charges in 2021 compared to $8.8 million that were recorded in 2020 related to the closure of our Warren, Michigan and Fremont, California facilities.

Advanced Materials

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Net sales from the Advanced Materials segment of $866.8 million in 2021 were 29% higher than net sales of $670.9 million in 2020.

The increase in net sales was primarily due to the impact of higher pass-through metal prices of $92.6 million.

Value-added sales of $234.0 million increased $9.7 million compared to value-added sales of $224.3 million in 2019 primarily due to increased value-added sales into the semiconductor end market, partially offset by reduced value-added sales into the energy and other end markets.

The increase in net sales was due to higher sales volumes totaling $146.5 million, sales from HCS-Electronic Materials totaling $21.4 million and pass-through metal prices totaling $30 million.

Value-added sales of $289.1 million increased 31% compared to value-added sales of $220.5 million in 2020.

Higher sales volumes into the semiconductor, industrial and energy markets accounted for $47.2 million and the HCS-Electronic Materials acquisition accounted for the remaining $21.4 million of the increase.

During the first quarter of 2021, we added ruthenium, iridium, rhodium, rhenium, and osmium to our definition of value-added sales as the costs of these materials are treated as pass-through and the business use and price volatility of these materials has increased in recent periods.

Prior period value-added sales amounts have been recast to reflect this change.

Advanced Materials generated operating profit of $35.3 million in 2021, compared to $22.1 million in 2020.

Decreased operating profit in 2020, compared to 2019, was the result of unfavorable sales mix and reduced manufacturing yields.

Increased operating profit in 2021, compared to 2020, was the result of strong demand across all of our product lines and improved product mix.

Precision Optics

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2021 Compared to 2020

Net sales from the Precision Optics segment of $111.2 million in 2020 decreased slightly compared to net sales of $111.5 million in 2019 primarily due to reduced sales volumes related to blood glucose test strip and projection display products and a lower mix of precious metal containing products, largely offset by an increase from sales attributable to our Optics Balzers acquisition.

Net sales from the Precision Optics segment were $132.0 million in 2021, an increase compared to net sales of $111.2 million in 2020.

The increase was due to the full year impact of the Optics Balzers acquisition offset in part by the closure of our LAC business on December 31, 2020.

Value-added sales of $131.8 million in 2021 increased 29% compared to value-added sales of $101.9 million in 2020.

The increase was driven by our Optics Balzers acquisition, which was partially offset by reduced value-added sales related to blood glucose test strip and projection display products.

The Precision Optics segment generated operating losses of $4.4 million and $3.6 million in 2020 and 2019, respectively.

The increase was driven by the full year impact of the Optics Balzers acquisition, which was partially offset by the closure of our LAC business on December 31, 2020.

The Precision Optics segment generated operating profit of $14.2 million in 2021 compared to an operating loss of $4.3 million in 2020.

The operating profit was driven by the full year impact of the Optics Balzers acquisition.

The 2020 operating loss includes impairment charges of $10.5 million and restructuring charges of $2.1 million primarily related to the closure of our LAC business.

The 2019 operating loss included impairment charges of $14.1 million related to our LAC business.

(Thousands) 2021 2020 2019

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The Other reportable segment in total includes unallocated corporate costs.

Corporate costs of $23.1 million in 2020 decreased $1.7 million as compared to $24.8 million in 2019.

Corporate costs were 3% of total Company value-added sales in both 2020 and 2019.

The decrease in corporate costs in 2020 compared to 2019 is primarily related to lower variable compensation expense and cost management actions, partially offset by transaction costs related to the Optics Balzers acquisition.

Corporate costs of $40.3 million in 2021 increased $17.2 million as compared to $23.1 million in 2020.

Corporate costs were 5% of total Company value-added sales in 2021 compared to 3% in 2020.

The increase in corporate costs in 2021 compared to 2020 was primarily due to the transaction costs related to the HCS-Electronic Materials acquisition and higher variable compensation expense related to strong 2021 operating performance.

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

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Total $ 859,700 $ 665,125 $ 726,749

The cost of gold, silver, platinum, palladium, and copper can be quite volatile.

Prior period value-added sales amounts have been recast to reflect this change.

The cost of gold, silver, platinum, palladium, copper, ruthenium, iridium, rhodium, rhenium, and osmium can be quite volatile.

Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations.

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(494,269) (194,707) (26,484)

Net cash (used in) financing activities

Net cash provided by (used in) financing activities

393,006 (7,091) (18,054)

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Net cash provided by operating activities totaled $90.2 million in 2021 versus $101.1 million in 2020.

Increased operating cash flow from customer prepayments of $49.4 million in 2020 was partially offset by $37.9 million of decreased net income.

Working capital requirements used cash of $23.9 million during 2020 compared to using $22.0 million in 2019.

Cash flows used in accounts receivable decreased $23.2 million.

Three-month trailing days sales outstanding (DSO) was approximately 41 days at December 31, 2020 versus 47 days at December 31, 2019.

Cash flows used for inventory were $1.3 million in 2020, compared to providing $20.5 million of cash in the prior year primarily in our Performance Alloys and Composites and Advanced Materials segments.

Cash flows used for accounts payable and accrued expenses were $21.9 million compared to the prior-year use of cash of $18.6 million due to incentive compensation payouts.

Decreased operating cash flow was due in part to the increase in A/R of $29.8 million to support higher sales in 2021 and a decrease in customer prepayments of $40.3 million was partially offset by $56.8 million of increased net income.

Working capital requirements used cash of $33.7 million during 2021 compared to a use of $23.9 million in 2020.

Cash flows used for inventory were $43.5 million in 2021, compared to using $1.3 million of cash in the prior year primarily in our Performance Alloys and Composites and Advanced Materials segments.

Price movements of precious and base metals are passed through to customers.

Therefore, while sudden movements in the price of metals can cause a temporary imbalance in our cash receipts and payments in either direction, once prices stabilize, our cash flow tends to stabilize as well.

Net cash used in investing activities was $194.7 million in 2020 compared to $26.5 million in 2019 due to a $130.7 million payment, net of cash acquired, for the Optics Balzers acquisition.

In addition, capital expenditures increased $43.0 million in 2020, compared to 2019, due to investments in new equipment funded by customer prepayments.

Cash flows generated from accounts payable and accrued expenses were $40.2 million compared to the prior-year use of cash of $21.9 million.

Net cash used in investing activities was $494.2 million in 2021 compared to $194.7 million in 2020 due to a $393 million payment, net of cash acquired, for the HCS-Electronic Materials acquisition.

In addition, capital expenditures increased by $35.6 million in 2021, compared to 2020, due to investments in new equipment funded in part by customer prepayments.

See Notes B and L to the Consolidated Financial Statements for additional discussion.

Net cash used in financing activities decreased $11.0 million from 2019 primarily due to net borrowings of $34.0 million under our revolving credit facility in 2020, partially offset by the paydown of $20.6 million of long-term debt, most of which was assumed in the Optics Balzers acquisition.

Net cash provided by (used in) financing activities increased $400.1 million from 2020 primarily due to net borrowings of $384.3 million, of which $84.3 million was from our revolving credit facility and $300 million from a new term loan, partially offset by the paydown of $2.1 million of long-term debt, most of which was assumed in the Optics Balzers acquisition.

Dividends per common share increased 4% to $0.475 per share in 2021.

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We intend to pay a quarterly dividend on an ongoing basis, subject to a continuing strong capital structure and a determination that the dividend remains in the best interest of our shareholders.

We believe that cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share repurchase programs, environmental remediation projects, and strategic acquisitions.

We believe that cash flow from operations plus available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share repurchase programs, environmental remediation projects, and strategic acquisitions.

At December 31, 2021, cash and cash equivalents held by our foreign operations totaled $12.5 million.

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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 year depicted.

The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.

In 2019, we amended and restated the agreement governing our $375.0 million revolving credit facility (Credit Agreement).

The maturity date of the Credit Agreement was extended from 2020 to 2024, and the Credit Agreement provides more favorable interest rates under certain circumstances.

In addition, 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 and certain other assets.

The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.

In 2021, we amended and restated the agreement governing our $375.0 million revolving credit facility (Credit Agreement) in connection with the HCS-Electronic Materials acquisition.

A $300 million delayed draw term loan facility was added to the Credit Agreement and the maturity date of the Credit Agreement was extended from 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 or prime rate and at varying maturities.

The premium resets quarterly according to the terms and conditions available under the agreement.

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 subject to a maximum leverage ratio and a minimum fixed charge coverage ratio.

In addition, the Credit Agreement includes covenants that limit the Company to a maximum leverage ratio and a maximum interest coverage ratio.

We were in compliance with all of our debt covenants as of December 31, 2021 and December 31, 2020.

Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.

In July 2020, we completed the acquisition of 100% of the capital stock of Optics Balzers.

The purchase price was approximately $136.1 million, including the assumption of debt.

The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.

Cash on hand up to $25 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 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103 million of borrowings under of borrowings under its amended revolving credit facility.

The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio.

Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements.

Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time.

In 2019, we entered into a precious metals consignment agreement, maturing on August 27, 2022.

The precious metal consignment agreement, entered into in 2019 and maturing on August 27, 2022, was amended in 2021 to be consistent with the Credit Agreement.

The available and unused capacity under the metal financing lines totaled approximately $69.8 million as of December 31, 2021, compared to $50.0 million as of December 31, 2020.

The availability is determined by Board approved levels and actual line capacity.

The Board approved a $100.0 million capacity increase in 2021 to better support customer demand.

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 repurchased 158,000 shares of our common stock for $6.8 million during 2020.

There is no minimum number of common shares required to be repurchased in a given year, and the repurchases may be discontinued at any time.

We did not repurchase any shares in 2021.

Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million, or an average of $33.23 per share.

Contractual Obligations

The following table summarizes contractual obligations as of December 31, 2020:

Material Future Cash Obligations

The following table summarizes our material future cash obligations as of December 31, 2021:

(Millions) 2022 2023 2024 2025 2026 There-

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11.5 11.0 8.8 7.9 6.5 47.1 92.8

Pension plan contributions (5)

— — — — — — —

Other long-term liabilities (5)

0.5 2.4 0.3 0.5 0.6 2.4 6.7

Purchase obligations 23.1 3.7 3.1 1.1 0.6 0.6 32.2

Total $ 37.3 $ 37.2 $ 46.5 $ 45.0 $ 374.6 $ 69.0 $ 609.4

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(4) The non-cancelable lease payments represent payments under operating leases with initial lease terms in excess of one year as of December 31, 2021.

(5) Our domestic defined benefit pension plan is overfunded as of December 31, 2020.

Contributions in future periods, if any, will be dependent upon regulatory requirements, the plan funded ratio, plan investment performance, discount rates, actuarial assumptions, plan amendments, our contribution objectives, and other factors.

We anticipate funding those contributions with cash on hand, cash generated from operations, or borrowings under our existing lines of credit.

It is not practical to estimate the required contributions beyond 2021 at the present time.

(5) Other long-term liabilities include environmental remediation costs.

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Refer to Note J for additional information.

We have proven and probable reserves of beryllium-bearing bertrandite ore in Juab County, Utah.

We own approximately 90 percent of the proven reserves, with the remaining reserves leased from the State of Utah.

We augment our proven reserves of bertrandite ore through the purchase of imported beryl ore from time to time.

This beryl ore, which is approximately four percent beryllium, is also processed at the Utah extraction facility.

Approximately 90 percent of the beryllium in ore is recovered in the extraction process.

Estimating the quantity and/or grade of ore reserves requires the size, shape, and depth of ore bodies to be determined by analyzing geological data such as drilling samples.

Economic assumptions used to estimate reserves change from period to period, and as additional geological and operational data is generated during the course of operations, estimates of reserves may change from period to period.

The term “proven reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings, or drill holes;

grade and/or quality are computed from the results of detailed sampling, (b) the sites for inspection, sampling, and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth, and mineral content of reserves are well-established, and (c) the ore is commercially recoverable through open-pit methods.

The term “probable reserves” means reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced.

The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

The following information concerning our mining properties has been prepared in accordance with the requirements of subpart 1300 of Regulation S-K, which first became applicable to us for the year ended December 31, 2021.

These requirements differ significantly from the previously applicable disclosure requirements of SEC Industry Guide 7.

Among other differences, subpart 1300 of Regulation S-K requires us to disclose our mineral resources, in addition to our mineral reserves, as of the end of our most recently completed fiscal year.

As used in this Form 10-K, the terms “mineral resource,” “measured mineral resource,” “indicated mineral resource,” “inferred mineral resource,” “mineral reserve,” “proven mineral reserve” and “probable mineral reserve” are defined and used in accordance with subpart 1300 of Regulation S-K.

Under subpart 1300 of Regulation S-K, mineral resources may not be classified as “mineral reserves” unless the determination has been made by a qualified person that the mineral resources can be the basis of an economically viable project.

You are specifically cautioned not to assume that any part or all of the mineral resources in these categories will ever be converted into mineral reserves, as defined by the SEC.

We rely on estimates of our ore resources and recoverable reserves, which estimation is complex due to geological characteristics of the properties and the number of assumptions made.

You are cautioned that, except for that portion of mineral resources classified as mineral reserves, mineral resources do not have demonstrated economic value.

Inferred mineral resources are estimates based on limited geological evidence and sampling and have a too high of a degree of uncertainty as to their existence to apply relevant technical and economic factors likely to influence the prospects of economic extraction in a manner useful for evaluation of economic viability.

Estimates of inferred mineral resources may not be converted to a mineral reserve.

It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category.

A significant amount of additional work must be completed in order to determine whether an inferred mineral resource may be upgraded to a higher category.

Therefore, you are cautioned not to assume that all or any part of an inferred mineral resource exists, that it can be the basis of an economically viable project, or that it will ever be upgraded to a higher category.

Likewise, you are cautioned not to assume that all or any part of measured or indicated mineral resources will ever be converted to mineral reserves.

The information that follows relating to the Spor Mountain Mine is derived, for the most part, from the TRS, which was prepared in compliance with Item 601(b)(96) and subpart 1300 of Regulation S-K.

Portions of the following information are based on assumptions, qualifications and procedures that are not fully described herein.

Reference should be made to the full text of the TRS, which is filed as Exhibit 96 to this Form 10-K and is incorporated by reference herein.

Mineral Resources

A mineral resource is a concentration or occurrence of material of economic interest in or on the Earth’s crust in such form, grade or quality, and quantity that there are reasonable prospects for economic extraction.

A mineral resource is a reasonable estimate of mineralization, taking into account relevant factors such as cut-off grade, likely mining dimensions, location or

continuity, that, with the assumed justifiable technical and economic conditions, is likely to, in whole or part, become economically extractable.

The term "measured mineral resource" is that part of a mineral resource for which quantity and grade or quality are estimated on the basis of conclusive geological evidence and sampling.

The term “indicated resources” means resources for which quantity and grade or quality can be estimated on the basis of adequate geological evidence and sampling.

The term “inferred resources” means resources for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling.

The following represents our indicated and inferred ore mineral resources, exclusive of mineral reserves, as of December 31, 2021:

Indicated Inferred

As of December 31, 2021

Tonnage (in thousands) 1,504 2,630

Grade (% beryllium) 0.128 % 0.345 %

Beryllium pounds (in millions) 38.38 18.12

As of December 31, 2020

Tonnage (in thousands) 1,504 2,630

Grade (% beryllium) 0.128 % 0.345 %

Beryllium pounds (in millions) 38.38 18.12

Mineral Reserves

A mineral reserve is an estimate of tonnage and grade, or quality, of indicated and measured mineral resources that, in the opinion of a qualified person, can be the basis of an economically viable project.

More specifically, it is the economically mineable part of a measured or Indicated mineral resource, which includes diluting materials and allowances for losses that may occur when the material is mined or extracted.

Proven mineral reserves are the economically mineable part of a measured mineral resource and can only result from conversion of a measured mineral resource.

Probable mineral reserves are the economically mineable part of an indicated and, in some cases, a measured mineral resource.

All mineral reserves are classified as proven or probable and are supported by life-of-mine plans.

All mineral reserve estimates were reviewed and validated by the Qualified Persons.

The following represents our ore mineral reserves:

Proven Probable Total

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Beryllium pounds (in millions) 38.31 4.97 43.28

Based upon average production levels in recent years and our near-term production forecasts, proven and probable reserves would last a minimum of seventy-five years.

Internal Controls Disclosure

Under subpart 1305 of Regulation S-K, management has included information regarding the internal controls that the Company used in determining the mineral resource and reserve estimation efforts.

There is no disclosure required regarding exploration procedures as the Company completed development drilling on all areas at the Spor Mountain Mine in 2000, and no future exploration is planned at this time.

As it relates to estimating mineral resources and reserves, the Company incorporates the following items into the control process:

All samples are tested with a berylometer.

The berylometer calibration procedures are verified through comparison with the beryllium production from the mill for the same ores.

The lab and field berylometers are calibrated on site each shift.

Materion follows industry standard procedures for calibrating its field and laboratory berylometers each shift that they are utilized.

Resource models are reconciled to production data regularly.

Materion has been producing ore at the Spor Mountain Mine for over 45 years and has mined and processed materials from a range of pits from the property.

It is considered that Materion has adequate data to support its milling practices.

The Qualified Persons have assessed that the Company’s control procedures, including redundant testing at various operational points, the quality control and quality assurance measures, the calibration measures, the extensive cataloging of sample duplicates, and the reconciliation with recovered beryllium, are sufficient.

Based upon average production levels in recent years and our near-term production forecasts, proven reserves would last a minimum of seventy-five years.

The table below details our production of beryllium at our Utah location.

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1) Identify the contract with a customer

A contract with a customer exists when the Company enters into an enforceable contract with a customer that identifies each party’s rights regarding the products to be transferred and the related payment terms related to these services, the contract has commercial substance, and the Company determines that collection of substantially all consideration for products that are transferred is probable based on the customer’s intent and ability to pay.

A contract with a customer exists when the Company enters into an enforceable contract with a customer that identifies each party’s rights regarding the products to be transferred or services to be rendered and the related payment terms, the contract has commercial substance, and the Company determines that collection of substantially all consideration for products that are transferred is probable based on the customer’s intent and ability to pay.

Management exercises judgment in its assessment that it is probable that the Company will collect substantially all of the payments attributed to products or services that will be transferred to our customers.

We regularly review the creditworthiness of our customers considering such factors as the macroeconomic environment, current market conditions, geographic considerations, historical collection experience, a customer’s current credit standing, and the age of accounts receivable balances that may affect a customer’s ability to pay.

If after we have recognized revenue, collectability of an account receivable becomes doubtful, we establish appropriate allowances and reserves against accounts receivable with respect to the previously recognized revenue that remains uncollected.

We regularly review the creditworthiness of our customers considering such factors as the macroeconomic environment, current market conditions, geographic considerations, historical collection experience, a customer’s current credit standing, and the age of outstanding accounts receivable balances that may affect a customer’s ability to pay.

If, after we have recognized revenue, the collectability of an account receivable becomes doubtful, we establish appropriate allowances and reserves against accounts receivable with respect to the previously recognized revenue that remains uncollected.

Allowances and reserves against accounts receivable are maintained for estimated probable losses and are sufficient enough to ensure that accounts receivable are stated at amounts that are considered collectible.

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3) Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer.

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products or services to the customer.

The vast majority of our contracts contain fixed consideration terms.

Company also has contracts with customers that include variable consideration.

However, the Company also has contracts with customers that include variable consideration.

Volume discounts and rebates are offered as an incentive to encourage additional purchases and customer loyalty.

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The Company recognizes revenue net of reserves for price adjustments, returns, and prompt payment discounts.

Management generally estimates this amount using the expected value method.

The Company has sufficient experience with our customers that provide predictive value that the reserves recorded are appropriate.

Management generally estimates these amounts using the expected value method.

The Company has sufficient historical experience with our customers that provides predictive value to support that the reserves recorded are appropriate.

Other considerations

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This contract liability is subsequently reversed and the revenue, cost of sales, and gross margin are recorded when the Company has transferred control of the product to the customer.

The related inventory also remains on our balance sheet until these revenue recognition criteria are met.

Advanced billings are typically made in association with products with long manufacturing times and/or products paid relating to contracts with the government.

The related inventory also

remains on our balance sheet until the revenue recognition criteria are met.

Advanced billings are typically made in association with products with long manufacturing times and/or products relating to contracts with the government.

Billings in advance of the shipments allow us to collect cash earlier than billing at the time of the shipment and, therefore, the collected cash can be used to reduce our investment in working capital.

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A valuation allowance may increase tax expense and reduce net income in the period it is recorded.

If a valuation allowance is no longer required, it will reduce tax expense and increase net income in the period that it is reversed.

We had valuation allowances of $14.1 million and $17.7 million associated with certain federal, state, and foreign deferred tax assets as of year-end 2020 and 2019, respectively, primarily for net operating loss carryforwards.

If a valuation allowance is no longer required, it will reduce tax expense and increase net income in the period in which it is reversed.

We had valuation allowances of $5.0 million and $14.1 million associated with certain federal, state, and foreign deferred tax assets as of year-end 2021 and 2020, respectively, primarily for net operating loss and capital loss carryforwards.

Refer to Note H of the Consolidated Financial Statements for additional deferred tax details.

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Our precious metal operations include a refinery that processes precious metal-containing scrap and other materials from our customers, as well as our own internally generated scrap.

We also outsource portions of our refining requirements to other vendors, particularly those materials with longer processing times.

We also outsource portions of our refining requirements to other vendors, particularly for those materials with longer processing times.

The precious metal content within these various refine streams may be in solutions, sludges, and other non-homogeneous forms and can vary over time based upon the input materials, yield rates, and other process parameters.

The determination of the weight of the precious metal content within the refine streams as part of a physical inventory count requires the use of estimates and calculations based upon assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volumes of solutions and other materials within the refinery, data from our refine vendors, and other factors.

refinery, data from our refine vendors, and other factors.

The resulting calculated weight of the precious metals in our refine operations may differ, in either direction, from what our records indicate that we should have on hand, which would then result in an adjustment to our pre-tax income in the period when the physical inventory was taken, and the related estimates were made.

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Finite-lived intangible assets are reviewed for impairment if facts and circumstances warrant.

There were no indicators during interim periods that required the performance of an interim impairment assessment.

The Company conducted its annual impairment assessment as of the first day of the fourth quarter.

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The remaining $25.8 million is related to the Performance Alloys and Composites segment.

In the first quarter of 2020, we recorded a $9.1 million charge to impair the remaining goodwill related to the closure of our LAC business.

We did not identify any other events or circumstances during 2020 that required the performance of an interim impairment assessment.

For the purpose of the annual goodwill impairment assessment, we have the option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary.

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An impairment charge is recognized for the amount the carrying value of the reporting unit exceeds its fair value.

At our September 26, 2020 annual assessment date, we opted to perform a “step zero” qualitative assessment for each of our reporting units.

At our October 2, 2021 annual assessment date, we opted to perform a “step zero” qualitative assessment for two of our reporting units, Performance Alloys and Composites and Advanced Materials.

The results of the step zero indicated that no goodwill impairment existed.

We also compared the market capitalization as of September 26, 2020 to the carrying value of our equity, noting no impairment indicators or triggering events.

The Company notes that reporting units with goodwill and indefinite-lived intangibles due to recent acquisitions are likely to have fair values to the proximity of the carrying value due to the shorter period of time for fair value from the recent acquisition to have changed.

The Precision Optics reporting unit includes the 2020 goodwill of $70.6 million related to the Optics Balzers acquisition.

As a result of the timing of the recent acquisition, the Company elected to assess the Precision Optics reporting unit goodwill balance by performing a quantitative impairment analysis.

The quantitative analysis compares estimated fair value of the reporting unit, using an income approach (a discounted cash flow model), as well as a market approach, with its carrying value.

The income approach and market approach are weighted in arriving at fair value based on the relative merits of the methods used and the quantity and quality of collected data to arrive at the indicated fair value.

The income approach requires several assumptions including future sales growth, EBITDA margins and capital expenditures.

The Company’s reporting units each provide their forecast of results for the next five years.

These forecasts form the basis for the information used in the discounted cash flow model.

The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the five years forecast by the reporting units), as well as projections of future operating margins (for the period beyond the forecast five years).

The Company used a discount rate in the mid-teens and a terminal growth rate of low single digits.

The market approach requires several assumptions including sales and EBITDA multiples for comparable companies that operate in the same markets as the reporting unit.

During the fourth quarter of 2021, the Company considered sales multiples in the low single digits and EBITDA multiples in the range high single digits to low double digits.

Based on the October 2, 2021 quantitative assessment for the Precision Optics reporting unit, the fair value exceeded the carrying value by a sufficient amount to support no indicators of impairment.

We also compared our market capitalization as of October 2, 2021 to the carrying value of our equity, noting no impairment indicators or triggering events.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis