What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-17 compared with 2021-02-18 · 226 added, 357 removed, 1271 unchanged (31% of the section changed)

3 unchanged sentences

Management’s Report on Internal Control over Financial Reporting 37

Reports of Independent Registered Public Accounting Firm 36

Reports of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Statements of Income for the Years Ended December 31, 2021, 2020, and 2019 42

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In making this assessment, it used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria) in Internal Control - Integrated Framework (2013).

The Company completed the acquisition of Optics Balzers AG (Optics Balzers) on July 17, 2020.

As permitted by SEC guidance, the scope of our evaluation of internal control over financial reporting as of December 31, 2020 did not include the internal control over financial reporting of Optics Balzers.

The results of Optics Balzers are included in our consolidated financial statements from the date of acquisition and constituted 22% of total assets as of December 31, 2020.

The Company completed the acquisition of HCS-Electronic Materials on November 1, 2021.

As permitted by SEC guidance, the scope of our evaluation of internal control over financial reporting as of December 31, 2021 did not include the internal control over financial reporting of HCS-Electronic Materials.

The results of HCS-Electronic Materials are included in our consolidated financial statements from the date of acquisition and constituted 28% of total assets as of December 31, 2021 and less than 1% of both net sales and net income for the year then ended.

Based on our assessment we believe that, as of December 31, 2021, the Company’s internal control over financial reporting is effective.

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, 2022 expressed an unqualified opinion thereon.

Change in Accounting Principles

As discussed in Note A to the consolidated financial statements, the Company elected to change its method of accounting for certain inventories to the first-in, first-out (“FIFO”) method during the year ended December 31, 2020.

Basis for Opinion

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How we addressed the matter in our audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s reconciliation of the precious metals consignment inventory processes.

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s reconciliation of the precious metals consignment inventory process.

This included controls over management's review of the significant inputs into and underlying the reconciliation.

To test the Company’s reconciliation of the precious metals physical consignment inventory, our procedures included, among others, evaluating the significant assumptions and data used to estimate the total value of the precious metal, which was identified through the physical inventory.

We observed the physical inventory process, tested inventory activity from the date of observation through December 31, 2020, evaluated the underlying data used in the reconciliation, and confirmed the consigned inventory held with the third parties.

We observed the physical inventory process, tested inventory activity from the date of observation through December 31, 2021, evaluated the underlying data used in the reconciliation, and confirmed certain consigned inventory held with the third parties.

We assessed the historical accuracy of management’s estimates, which are based on assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volume of solutions and other materials within the refinery, data from their refine vendors, and other factors and assessed the historical accuracy of management’s analysis to evaluate the assumptions that were most significant to the calculated weight of the precious metal inventory.

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Description of the matter

During 2020, the Company completed its acquisition of Optics Balzers AG for a purchase price of $136.1 million, including the assumption of debt, as disclosed in Note B to the consolidated financial statements.

During 2021, the Company completed its acquisition of HCS-Electronic Materials for a purchase price of $395.9 million in cash, on a cash-free, debt-free basis, as disclosed in Note B to the consolidated financial statements.

The transaction was accounted for as a business combination.

Auditing the Company's accounting for its acquisition of Optics Balzers AG was complex due to the significant estimation required by management and its specialists to determine the fair value of the acquired intangible assets, specifically customer relationships.

The significant estimation was primarily due to the subjectivity of the assumptions used by management to measure the fair value of the customer relationships intangible asset and the sensitivity of the respective fair value to the significant underlying assumptions.

The Company used a multi-period excess earnings method under the income approach to value this intangible asset.

The significant assumptions used to estimate the fair value included the discount rate and certain assumptions that form the basis of future cash flows (including revenue growth rates and attrition rate).

These assumptions relate to the future performance of the acquired business, are forward-looking and could be affected by future economic and market conditions.

Auditing the Company's accounting for its acquisition of HCS-Electronic Materials was complex due to the significant estimation required by management and its specialists to determine the fair value of the acquired intangible assets, specifically trade names, developed technology and customer relationships.

The significant estimation was primarily due to the subjectivity of the assumptions used by management to measure the fair value of these intangible assets and the sensitivity of the respective fair value to the significant underlying assumptions.

The Company used a relief from royalty method under the income approach to value its tradenames and developed technology and the multi-period excess earnings method under the income approach to value customer relationships.

The significant assumptions used to estimate the fair value of these intangible assets included the discount rate and certain assumptions that form the basis of future cash flows (including revenue growth rates, royalty rates for trade names and developed technology, and attrition rates for customer relationships).

These assumptions relate to the future performance of the acquired businesses, are forward-looking and could be affected by future economic and market conditions.

How we addressed the matter in our audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the recognition and measurement of customer relationships intangible assets that address the risks of material misstatement.

Our tests included controls over the recognition and measurement of customer relationships, including the valuation models and underlying assumptions, as described above, used to develop such estimates.

To test the estimated fair value of customer relationships, we performed audit procedures that included, among others, evaluating the methods and significant assumptions used by the Company, as described above, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.

We also utilized our specialists to review the valuation methodology, discount rate, and attrition rate.

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the recognition and measurement of these intangible assets that address the risks of material misstatement.

Our tests included controls over the valuation models and underlying assumptions, as described above, used to develop such estimates.

To test the estimated fair value of these intangible assets, we performed audit procedures that included, among others, evaluating the methods and significant assumptions used by the Company, as described above, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.

We also utilized our specialists to review the valuation methodology, discount rates and royalty rates.

/s/ Ernst & Young LLP

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In our opinion, Materion Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Optic Balzers AG, which is included in the 2020 consolidated financial statements of the Company and constituted 22% of total assets as of December 31, 2020.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Optics Balzers AG.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of HCS-Electronic Materials, which is included in the 2021 consolidated financial statements of the Company and constituted 28% of total assets as of December 31, 2021 and less than 1% of both net sales and net income for the year then ended.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of HCS-Electronic Materials.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Materion Corporation and subsidiaries as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 17, 2022 expressed an unqualified opinion thereon.

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— 1,419 2,581

Restructuring expense (Note E)

Restructuring (income) expense (Note E)

( 438 ) 11,237 785

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

Income tax (benefit) expense (Note H)

Income tax expense (benefit) (Note H)

4,851 ( 7,187 ) 12,142

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Diluted 20,689 20,603 20,655

*Years ended December 31, 2019 and 2018 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.

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Foreign currency translation adjustment ( 6,904 ) 9,030 ( 421 )

Derivative and hedging activity, net of tax benefit of $28, $5, and $672, respectively ( 80 ) ( 4 ) 138

Pension and post-employment benefit adjustment, net of tax benefit (expense) of $651, ($4,741), and ($13,300), respectively ( 2,127 ) 13,197 45,049

Derivative and hedging activity, net of tax expense (benefit) of $ 482 , $( 28 ), and $( 5 ), respectively

1,603 ( 80 ) ( 4 )

Pension and post-employment benefit adjustment, net of tax expense (benefit) of $ 1,094 , $( 651 ), and $ 4,741 , respectively

3,771 ( 2,127 ) 13,197

Other comprehensive income ( 1,530 ) 6,823 12,772

Comprehensive income $ 70,944 $ 22,285 $ 66,166

*Years ended December 31, 2019 and 2018 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.

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Stock-based compensation expense (non-cash) 6,517 5,528 7,170

5,528 7,170 5,313

Amortization of pension and post-retirement costs 437 ( 151 ) 386

( 151 ) 386 5,551

Loss on sale of property, plant, and equipment 466 344 518

(Gain) loss on sale of property, plant, and equipment ( 282 ) 466 344

Deferred income tax (benefit) expense ( 12,957 ) ( 9,850 ) 3,945

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Cash flows from financing activities:

Proceeds from short-term debt under revolving credit agreement, net 34,000 — —

Proceeds from borrowings under revolving credit agreement, net 118,297 34,000 —

Proceeds from term loan 300,000 — —

Repayment of long-term debt ( 2,054 ) ( 20,634 ) ( 823 )

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Payments of withholding taxes for stock-based compensation awards ( 3,318 ) ( 2,221 ) ( 4,846 )

Net cash used in financing activities ( 7,091 ) ( 18,054 ) ( 13,605 )

Net cash provided by (used in) financing activities 393,006 ( 7,091 ) ( 18,054 )

Effects of exchange rate changes ( 394 ) 1,612 ( 322 )

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Cash and cash equivalents at end of period $ 14,462 $ 25,878 $ 125,007

*Years ended December 31, 2019 and 2018 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.

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Intangible assets (Notes A and N)

156,736 54,672

Other assets (Note P)

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Long-term debt (Note O)

434,388 36,542

Shareholders’ equity

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60,000 authorized shares, issued shares of 27,148 for both 2021 and 2020)

271,978 258,642

Retained earnings 693,756 631,058

Common stock in treasury ( 6,700 shares for 2021 and 6,820 shares for 2020)

( 209,920 ) ( 199,187 )

Accumulated other comprehensive loss (Note Q)

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Total Liabilities and Shareholders’ Equity $ 1,607,479 $ 1,057,860

*December 31, 2019 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.

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Income (Loss) Other

Equity Total*

Balance at January 1, 2018 (previously reported) 20,107 7,042 $ 223,484 $ 536,116 $ ( 166,128 ) $ ( 102,937 ) $ 4,446 $ 494,981

Inventory accounting method change* — — — 32,134 — — — 32,134

Balance at January 1, 2018* 20,107 7,042 223,484 568,250 ( 166,128 ) ( 102,937 ) 4,446 527,115

Balance at December 31, 2018 20,242 6,906 $ 234,704 $ 580,706 $ ( 175,426 ) $ ( 58,234 ) $ 4,488 $ 586,238

Net income — — — 53,394 — — — 53,394

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Net pension curtailments and settlements — — — — — 3,328 — 3,328

Tax Cuts and Jobs Act Reclassification — — — ( 575 ) — 575 — —

Cumulative effect of accounting change — — — ( 179 ) — — — ( 179 )

Cash dividends declared ($ 0.435 per share)

— — — ( 8,856 ) — — — ( 8,856 )

Stock-based compensation activity 252 ( 252 ) 14,876 ( 111 ) ( 7,595 ) — — 7,170

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Net pension curtailments and settlements — — — — — 94 — 94

Cumulative effect of accounting change — — — ( 179 ) — — — ( 179 )

Cash dividends declared ($ 0.455 per share)

— — — ( 9,257 ) — — — ( 9,257 )

Stock-based compensation activity 117 ( 117 ) 8,867 ( 101 ) ( 3,147 ) — — 5,619

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Other comprehensive income — — — — — ( 1,530 ) — ( 1,530 )

Net pension curtailments and settlements — — — — — 94 — 94

Cash dividends declared ($ 0.475 per share)

— — — ( 9,697 ) — — — ( 9,697 )

Stock-based compensation activity 164 ( 164 ) 13,142 ( 79 ) ( 6,546 ) — — 6,517

Payments for withholding taxes for stock-based compensation awards ( 49 ) 49 — — ( 3,318 ) — — ( 3,318 )

Repurchase of shares ( 158 ) 158 — — ( 6,766 ) — — ( 6,766 )

Directors’ deferred compensation 5 ( 5 ) 193 — ( 869 ) — 1,040 364

Balance at December 31, 2021 20,448 6,700 $ 271,977 $ 693,756 $ ( 209,920 ) $ ( 40,169 ) $ 4,796 $ 720,440

*The balances at January 1, 2018 and the years ended December 31, 2018 and 2019 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.

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Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

The amounts reflected in Note B to the Consolidated Financial Statements are the results of the preliminary purchase price allocation for the Optics Balzers acquisition and will be updated upon completion of the final valuation.

The amounts reflected in Note B are the results of the preliminary purchase price allocation for the HCS-Electronic Materials acquisition and will be updated upon completion of the final valuation.

The Company is required to complete the purchase price allocation within 12 months of the acquisition date.

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Actual results may differ from those estimates.

Change in Accounting Principle:

During the fourth quarter of 2020, the Company changed its method of accounting for certain domestic inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.

All prior periods presented have been retroactively adjusted to apply the new method of accounting.

Consolidation:

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Additionally, the allowance is based upon identified delinquent accounts, customer payment patterns, and other analyses of historical data and trends.

Accounts receivable were net of an allowance for credit losses of $ 0.5 million and $ 0.4 million at December 31, 2020 and 2019, respectively.

The change in the allowance for credit losses includes expense and net write-offs, none of which are material.

Accounts receivable were net of an allowance for credit losses of $ 0.5 million at both December 31, 2021 and 2020.

The change in the allowance for credit losses includes expense and net write-offs, neither of which were material.

The Company extends credit to customers based upon their financial condition, and collateral is not generally required.

Inventories are stated at lower of cost or net realizable value.

All of the Company's inventories, except for its bertrandite ore mine which values inventory using a weighted average cost method, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, have been valued using the first-in, first-out (FIFO) method as of December 31, 2021 and 2020.

Property, Plant, and Equipment:

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Property acquisition costs are capitalized as mineral resources on the balance sheet and are depleted using the units-of-production method based upon total estimated recoverable proven reserves of the beryllium-bearing bertrandite ore body.

The Company uses beryllium pounds as the unit of accounting measure, and depletion expense is recorded on a pro-rata basis based upon the amount of beryllium pounds extracted as a percentage of total estimated beryllium pounds contained in all ore bodies.

Mine development costs at the Company's open pit surface mine include drilling, infrastructure, and other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body.

Before mineralization is classified as proven and probable reserves, costs are classified as exploration expense.

Mine development costs at our open pit surface mines include drilling, infrastructure, other related costs to delineate an ore body and the removal of overburden to initially expose an ore body.

Costs incurred before mineralization is classified as proven and probable reserves are expensed and classified as exploration expense.

Capitalization of mine development project costs, that meet the definition of an asset, begins once mineralization is classified as proven and probable reserves.

Historically, the Company’s mine development costs involved the development of a new source of ore, and, as such, mine development costs incurred were capitalized during the pre-production phase of a mine and amortized into inventory as the ore was extracted.

In 2020, the Company expanded a mine to further develop an ore body.

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This expansion is expected to benefit future periods.

Drilling and related costs are capitalized for an ore body where proven and probable reserves exist, and the activities are directed at obtaining additional information on the ore body.

All other drilling and related costs are expensed as incurred.

Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.

The costs of removing overburden and waste materials to access the ore body at an open-pit mine prior to the production phase are capitalized during the development of an open-pit mine and are capitalized at each pit.

The cost of removing overburden and waste materials to access the ore body at an open-pit mine prior to the production phase is capitalized during the development of an open-pit mine and are capitalized at each pit.

These costs are amortized as the ore is extracted using the units-of-production method based upon total estimated recoverable proven reserves for the individual pit.

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Costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore block area.

Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.

All other drilling and related costs are expensed as incurred.

Goodwill and Other Intangible Assets:

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The Company conducts its annual goodwill and indefinite-lived intangible asset impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances.

For the purpose of the goodwill impairment assessment, the Company has 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 or a quantitative assessment ("step one") where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach).

For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis of impairment of goodwill or indefinite-lived intangible assets is necessary or a quantitative assessment ("step one") where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach).

Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment.

Intangible assets with finite lives are amortized using the straight-line method or effective interest

method, as applicable, over the periods estimated to be benefited, which is generally 20 years or less.

Intangible assets with finite lives are amortized using the straight-line method or effective interest method, as applicable, over the periods estimated to be benefited, which is generally 20 years or less.

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

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When the assets subject to reimbursement are placed in service, the total cost is depreciated over the useful lives, and the unearned income liability is reduced and credited to cost of sales on the Consolidated Statements of Income ratably with the annual depreciation expense.

Also included in Unearned Income as of December 31, 2020 are $ 58.8 million of customer prepayments.

Also included in Unearned Income as of December 31, 2021 and 2020, are $ 72.6 million and $ 58.8 million, respectively, of customer prepayments.

See Note L for additional discussion.

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The fair value of SARs is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield.

The portion of the PRSU awards that are valued based on the Company's total shareholder return as compared to peers is valued using Monte Carlo simulations, which incorporates assumptions regarding the expected volatility, the expected correlation, and the risk-free interest rate.

See Note R for additional information about stock-based compensation.

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New Pronouncements Adopted:

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses .

This ASU requires an entity to change its accounting

approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model.

The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years.

The Company adopted this guidance as of January 1, 2020, and the adoption did not have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14 Defined Benefit Plans (Topic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans, which intends to improve disclosure effectiveness by adding, removing, or clarifying certain disclosure requirements related to defined benefit pension or other postretirement plans .

The standard is effective for fiscal years ending after December 15, 2020.

The Company adopted this guidance as of December 31, 2020.

The effect of the adoption did not materially impact the Company's financial statements or related disclosures.

In November 2020, the Securities Exchange Commission (SEC) issued the SEC Final Rule Release No.

33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information , which simplifies Management’s Discussion and Analysis (MD&A) and certain financial disclosure requirements in SEC regulation S-K.

The final rule eliminates Regulation S-K, Item 301, “Selected Financial Data”, simplifies Regulation S-

K, Item 302, “Supplementary Financial Information”, and amends certain aspects of Regulation S-K, Item 303, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

The Company adopted the standard on December 31, 2021.

The adoption did not materially impact the Company's financial statements or disclosures.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

This guidance requires companies to apply ASC 606 on the acquisition date to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination.

This is an exception to the recognition and measurement principle in ASC 805 which generally requires an acquirer to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date.

For public entities, the guidance is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted.

The Company has early adopted this guidance and has applied it to the accounting for contract assets and contract liabilities acquired as part of the HCS-Electronic Materials (as defined in Note B) acquisition.

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 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 does not expect the transition away from LIBOR to have a material impact on interest expense or on the financial statements.

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.

Inventories are stated at the lower of cost or net realizable value.

In the fourth quarter of 2020, the Company voluntarily changed its method of inventory costing for the majority of its domestic inventories to the FIFO method from the LIFO method.

Except for its bertrandite ore mine which values inventory using a weighted average cost method, the Company's remaining inventories are valued using the FIFO method.

The Company believes that a current costing 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.

Prior to the change in method, inventories valued on the LIFO cost method were approximately 45 % of the Company's total inventories as of December 31, 2020.

The effects of the change in accounting principle from LIFO to FIFO have been retrospectively applied to all periods presented.

As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheets as of December 31, 2019 and the consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2019 and 2018 were adjusted as necessary.

As a result of the retrospective application of this change in accounting method, the following financial statement line items within the accompanying financial statements were adjusted, as follows:

Consolidated Statements of Income

(Thousands except per share amounts)

2020 2019 2018

Selected Items As Computed Under LIFO As Reported Under FIFO Difference Previously Reported As Adjusted Adjustment Previously Reported As Adjusted Adjustment

Cost of sales $ 981,722 $ 983,641 $ 1,919 $ 926,280 $ 922,734 $ ( 3,546 ) $ 956,710 $ 956,454 $ ( 256 )

Gross margin 194,552 192,633 ( 1,919 ) 259,144 262,690 3,546 251,105 251,361 256

Operating profit 10,134 8,215 ( 1,919 ) 67,000 70,546 3,546 61,496 61,752 256

Income before income taxes 10,194 8,275 ( 1,919 ) 61,990 65,536 3,546 16,342 16,598 256

Income tax (benefit) expense ( 6,748 ) ( 7,187 ) ( 439 ) 11,330 12,142 812 ( 4,504 ) ( 4,446 ) 58

Net income 16,942 15,462 ( 1,480 ) 50,660 53,394 2,734 20,846 21,044 198

Basic earnings per share:

Net income per share of common stock $ 0.83 $ 0.76 $ ( 0.07 ) $ 2.49 $ 2.62 $ 0.13 $ 1.03 $ 1.04 $ 0.01

Diluted earnings per share:

Net income per share of common stock $ 0.82 $ 0.75 $ ( 0.07 ) $ 2.45 $ 2.59 $ 0.14 $ 1.01 $ 1.02 $ 0.01

Consolidated Statements of Comprehensive Income

2020 2019 2018

Selected Items As Computed Under LIFO As Reported Under FIFO Difference Previously Reported As Adjusted Adjustment Previously Reported As Adjusted Adjustment

Net income $ 16,942 $ 15,462 $ ( 1,480 ) $ 50,660 $ 53,394 $ 2,734 $ 20,846 $ 21,044 $ 198

Comprehensive income 23,765 22,285 ( 1,480 ) 63,432 66,166 2,734 65,549 65,747 198

Consolidated Balance Sheets

Selected Items As Computed Under LIFO As Reported Under FIFO Difference Previously Reported As Adjusted Adjustment

Inventories, net $ 206,834 $ 250,778 $ 43,944 $ 190,390 $ 236,253 $ 45,863

Prepaid and other current assets 23,470 20,896 ( 2,574 ) 21,839 21,736 ( 103 )

Deferred income taxes (liability) 8,081 15,864 7,783 2,410 13,104 10,694

Retained earnings 597,471 631,058 33,587 589,888 624,954 35,066

Consolidated Statements of Cash Flows

2020 2019 2018

Selected Items As Computed Under LIFO As Reported Under FIFO Difference Previously Reported As Adjusted Adjustment Previously Reported As Adjusted Adjustment

Net income $ 16,942 $ 15,462 $ ( 1,480 ) $ 50,660 $ 53,394 $ 2,734 $ 20,846 $ 21,044 $ 198

Deferred income tax (benefit) expense ( 6,940 ) ( 9,850 ) ( 2,910 ) 2,584 3,945 1,361 ( 1,318 ) ( 1,912 ) ( 594 )

Decrease (increase) in inventory ( 3,207 ) ( 1,288 ) 1,919 24,031 20,485 ( 3,546 ) 4,234 3,978 ( 256 )

Decrease (increase) in prepaid and other current assets 4 2,475 2,471 1,418 869 ( 549 ) 1,162 1,814 652

As a result of the retrospective application of this change in accounting principle, the following financial statement line items within the unaudited interim 2020 and 2019 quarterly condensed consolidated financial statements were adjusted, as follows:

Quarterly Data (unaudited)

(Thousands except per share amounts)

First Quarter Second Quarter

Selected Items Previously Reported As Adjusted Adjustment Previously Reported As Adjusted Adjustment

Cost of sales $ 232,371 $ 233,376 $ 1,005 $ 223,378 $ 224,513 $ 1,135

Gross margin 45,575 44,570 ( 1,005 ) 48,090 46,955 ( 1,135 )

Operating (loss) profit ( 4,563 ) ( 5,568 ) ( 1,005 ) 8,706 7,571 ( 1,135 )

(Loss) Income before income taxes ( 3,865 ) ( 4,870 ) ( 1,005 ) 8,298 7,163 ( 1,135 )

Income tax (benefit) expense ( 762 ) ( 992 ) ( 230 ) 1,620 1,360 ( 260 )

Net (loss) income ( 3,103 ) ( 3,878 ) ( 775 ) 6,678 5,803 ( 875 )

Basic earnings per share:

Net (loss) income per share of common stock $ ( 0.15 ) $ ( 0.19 ) $ ( 0.04 ) $ 0.33 $ 0.29 $ ( 0.04 )

Diluted earnings per share:

Net (loss) income per share of common stock $ ( 0.15 ) $ ( 0.19 ) $ ( 0.04 ) $ 0.32 $ 0.28 $ ( 0.04 )

(Thousands except per share amounts)

Third Quarter Fourth Quarter

Selected Items Previously Reported As Adjusted Adjustment As Computed Under LIFO As Reported Difference

Cost of sales $ 240,531 $ 241,860 $ 1,329 $ 285,442 $ 283,892 $ ( 1,550 )

Gross margin 46,640 45,311 ( 1,329 ) 54,247 55,797 1,550

Operating (loss) profit 713 ( 616 ) ( 1,329 ) 5,278 6,828 1,550

(Loss) Income before income taxes 455 ( 874 ) ( 1,329 ) 5,306 6,856 1,550

Income tax (benefit) expense ( 6,041 ) ( 6,345 ) ( 304 ) ( 1,565 ) ( 1,210 ) 355

Net income 6,496 5,471 ( 1,025 ) 6,871 8,066 1,195

Basic earnings per share:

Net income per share of common stock $ 0.32 $ 0.27 $ ( 0.05 ) $ 0.34 $ 0.40 $ 0.06

Diluted earnings per share:

Net income per share of common stock $ 0.32 $ 0.27 $ ( 0.05 ) $ 0.33 $ 0.39 $ 0.06

(Thousands except per share amounts)

First Quarter Second Quarter

Selected Items Previously Reported As Adjusted Adjustment Previously Reported As Adjusted Adjustment

Cost of sales $ 232,129 $ 231,835 $ ( 294 ) $ 228,249 $ 225,846 $ ( 2,403 )

Gross margin 69,312 69,606 294 69,594 71,997 2,403

Operating profit 21,387 21,681 294 22,750 25,153 2,403

Income before income taxes 20,676 20,970 294 19,138 21,541 2,403

Income tax expense 3,770 3,837 67 3,598 4,148 550

Net income 16,906 17,133 227 15,540 17,393 1,853

Basic earnings per share:

Net income per share of common stock $ 0.83 $ 0.85 $ 0.02 $ 0.76 $ 0.85 $ 0.09

Diluted earnings per share:

Net income per share of common stock $ 0.82 $ 0.83 $ 0.01 $ 0.75 $ 0.84 $ 0.09

(Thousands except per share amounts)

Third Quarter Fourth Quarter

Selected Items Previously Reported As Adjusted Adjustment Previously Reported As Adjusted Adjustment

Cost of sales $ 240,748 $ 239,374 $ ( 1,374 ) $ 225,154 $ 225,679 $ 525

Gross margin 65,231 66,605 1,374 55,007 54,482 ( 525 )

Operating profit 6,289 7,663 1,374 16,574 16,049 ( 525 )

Income before income taxes 5,726 7,100 1,374 16,450 15,925 ( 525 )

Income tax expense 2,263 2,578 315 1,699 1,579 ( 120 )

Net income 3,463 4,522 1,059 14,751 14,346 ( 405 )

Basic earnings per share:

Net income per share of common stock $ 0.17 $ 0.22 $ 0.05 $ 0.72 $ 0.70 $ ( 0.02 )

Diluted earnings per share:

Net income per share of common stock $ 0.17 $ 0.22 $ 0.05 $ 0.71 $ 0.69 $ ( 0.02 )

Note B — Acquisition

On July 17, 2020, the Company acquired 100% of the capital stock of 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, including a portion of the $ 150.0 million borrowed under our revolving credit facility during the first half of 2020.

This business operates within the Precision Optics segment, and the results of operations are included as of the date of acquisition.

The combination of Materion and Optics Balzers creates a premier optical thin film coating solutions provider with a highly complementary geographic, product, and end market portfolio.

On November 1, 2021, the Company acquired the industry-leading electronic materials business of H.C.

Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $ 395.9 million, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism.

Acquisition-related transaction and integration costs totaled $ 11.8 million in 2021.

These costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income.

Acquisition-related inventory step-up expense during the fourth quarter of 2021 was $ 5.0 M and are recorded in cost of sales in the Consolidated Statements of Income.

The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $ 300 million five-year term loan pursuant to a delayed draw term loan facility 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.

This acquired business operates within the Performance Alloys and Composites and Advanced Materials segments, and the results of operations are included as of the date of acquisition.

The combination of Materion and HCS-Electronic Materials enhances the Company's position as the leading supplier to the high growth semiconductor industry.

The preliminary purchase price allocation for the acquisition is as follows:

(Thousands) July 17, 2020

(Thousands) November 1, 2021

Cash and cash equivalents $ 3,685

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Intangible assets 107,800

Other long-term assets 4,528

Goodwill 178,181

Total assets acquired $ 444,688

Short-term debt $ 600

Accounts payable $ 12,139

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Income taxes 2,183

Unearned revenue 1,259

Other long-term liabilities 5,543

Operating lease liabilities 6,042

Finance lease liabilities 2,642

Retirement and post-employment benefits 6,586

Unearned income 1,835

Long-term income taxes 181

Deferred income taxes 20,300

Long-term debt 21,926

Total liabilities assumed $ 48,751

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Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date.

The Company engaged specialists to assist in the valuation of property, plant, and equipment, intangible assets, and retirement and post-employment benefits.

The estimates in the purchase price allocation are based on available information and will be revised during the measurement period, not to exceed 12 months, as additional information becomes available on tax-related items, and as additional analysis is performed.

Such revisions are not expected to have a material impact on the Company's results of operations and financial position.

No material measurement period adjustments have been recorded since the acquisition date.

The Company's consolidated financial statements include the results of operations of Optics Balzers from the acquisition date through December 31, 2020.

The amount of Net sales and operating results attributable to the acquisition during this period were not material.

Acquisition-related transaction and integration costs totaled $ 6.5 million in 2020.

These costs are included in selling, general, and administrative expense in the Consolidated Statements of Income.

As part of the acquisition, the Company recorded approximately $ 70.6 million of goodwill in its Precision Optics segment.

The Company engaged specialists to assist in the valuation of inventories, property, plant, and equipment, and intangible assets.

The purchase price allocation is preliminary as a result of the proximity of the acquisition date to December 31, 2021, and as a result, no elements of the purchase price allocation have been finalized.

During the measurement period for each acquisition, we will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date.

The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date.

In determining the fair value of the amounts above, inventory is fair valued based on the comparative sales method for work in process and finished goods at the selling price less cost to dispose and remaining manufacturing effort.

The remaining working capital accounts' carrying values approximate fair value.

For property, plant and equipment and intangible asset values, the Company utilized various forms of the income, cost and market approaches depending on the asset being valued.

The Company used a relief from royalty method under the income approach to value its trade names and developed technology and the multi-period excess earnings method under the income approach to value customer relationships.

Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions and are considered Level 3 assets as the assumptions are unobservable inputs developed by the Company.

The Company's consolidated financial statements include the results of operations of HCS-Electronic Materials from the acquisition date through December 31, 2021.

As part of the acquisition, the Company recorded approximately $ 178.2 million of goodwill allocated between its Advance Materials and Performance Alloys and Composites segments based on the relative fair values.

Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired and primarily attributable to the synergies expected to arise after the acquisition dates.

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

(Thousands) Value at Acquisition Weighted Average Life

(Thousands) Value at Acquisition Useful Life

Customer relationships $ 50,200 13 years

Technology 35,300 13 years

Licenses and other 5,100 5 years

Trade name 22,300 15 years

Total $ 107,800

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials since the acquisition date in the consolidated statements are $ 26.7 million and ($ 2.8 ) million, respectively and include two months of the purchase accounting inventory step-up expense.

Had the HCS-Electronic Materials acquisition occurred as of the beginning of fiscal 2020, the Company's sales and income (loss) before taxes would have been as follows:

Year Ended December 31,

Net Sales $ 1,659,620 $ 1,308,300

Profit income (loss) before taxes $ 91,551 $ ( 17,761 )

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments that assume the acquisition occurred on January 1, 2020.

These unaudited pro forma results do not represent financial results realized, nor are they intended to be a projection of future results.

The transaction accounting adjustments and other adjustments are based on available information and assumptions that the Company’s management believes are reasonable.

Such adjustments are estimates and actual experience may differ from expectations.

The amortization of inventory step-up from the preliminary purchase price allocation of approximately $ 15 million of expense is reflected in the 2020 unaudited pro forma income (loss) before taxes above.

Additionally, the 2020 pro forma income (loss) before taxes includes approximately $ 10 million of additional interest expense related to committed financing to fund the acquisition, annual acquisition-related intangible asset amortization expense of $ 8.2 million, and transaction expenses of $ 5.5 million as if it occurred on January 1, 2020.

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 $ 70.6 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 2021, and as of October 1, 2021, the purchase price allocation is complete.

Note C — Segment Reporting and Geographic Information

Certain amounts below have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as described in Note A.

The Company has the following operating segments:

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

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

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

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

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Intersegment sales are eliminated in consolidation.

The primary measure of evaluating segment performance is operating profit.

From an assets perspective, segments are evaluated based upon a return on invested capital metric, which includes inventory, accounts receivable, and property, plant, and equipment.

The primary measure used in evaluating segment performance is operating profit.

Segment assets are evaluated based upon a return on invested capital metric, which includes inventory, accounts receivable, and property, plant, and equipment.

A reconciliation of total segment operating profit to total consolidated income before income taxes is as follows:

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The Company recognized approximately $ 6.8 million of the December 31, 2020 unearned amounts as revenue during 2021.

The Company recognized approximately $ 3.2 million of the December 31, 2019 unearned amounts as revenue during 2020.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less.

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During the third quarter of 2020, the Company concluded that it intended to close its LAC business and, as a result, only a portion of the fixed assets of the LAC business are classified as held for sale.

At December 31, 2020, fixed assets totaling $ 0.2 million were classified as held for sale and reflected within Prepaid and other current assets in the Consolidated Balance Sheet.

At December 31, 2020, fixed assets totaling $ 0.2 million were classified as held for sale and reflected within Prepaid and other current assets in the Consolidated Balance Sheet, and these assets were disposed of in early 2021.

In 2021, the Company resolved the remaining restructuring items that held over from 2020 and as a result reversed $ 0.4 million of accruals that were on the balance sheet at the end of 2020.

Costs associated with the closure of the LAC business totaled $ 1.7 million in 2020 and included $ 0.7 million of severance associated with approximately 20 employees and $ 1.0 million of facility and other related costs.

Remaining severance payments of $ 0.6 million and facility costs of $ 1.0 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items, respectively, in the Consolidated Balance Sheet.

The Company expects to incur additional costs related to these initiatives of approximately $ 0.2 million in the first quarter of 2021.

All remaining severance payments were paid in 2021.

In addition, in 2020, the Company completed additional cost reduction actions in order to align costs with commensurate business levels in its Precision Optics segment.

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Costs associated with these actions totaled $ 0.4 million and included severance associated with approximately 28 employees and other related costs, all of which was paid during 2020.

Also, in 2020, the Company initiated a restructuring plan in its PAC segment to close its Warren, Michigan and Fremont, California locations.

Also, in 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 $ 8.8 million in 2020 and included $ 2.1 million of severance associated with approximately 63 employees, and $ 5.3 million of facility and other related costs.

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The Company does not expect to incur any additional costs associated with these initiatives.

Remaining severance payments as of December 31, 2021 were immaterial.

In 2019, the Company initiated a restructuring plan in its LAC business to reduce headcount, idle certain machinery and equipment, and exit a facility in Windsor, Connecticut.

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Costs associated with cost reduction actions in 2018 were in the Advanced Materials segment and included severance associated with approximately forty employees and other related costs.

Remaining severance payments amount to approximately $ 0.3 million as of December 31, 2020.

Remaining severance payments as of December 31, 2021 are immaterial.

These costs are presented in the Company's segment results as follows:

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Amortization of intangible assets 5,973 2,377 1,400

Foreign currency (gain) loss ( 2,569 ) 666 1,487

Net loss on disposal of fixed assets 466 344 518

Foreign currency loss (gain) 1,573 ( 2,569 ) 666

Net (gain) loss on disposal of fixed assets ( 282 ) 466 344

Rental income — — ( 87 )

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Note G — Interest Expense-net

The following chart summarizes the interest incurred, capitalized, and paid for 2020, 2019, and 2018:

The following chart summarizes the interest incurred, capitalized, and paid in 2021, 2020, and 2019:

(Thousands) 2021 2020 2019

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Interest paid $ 3,652 $ 3,442 $ 1,799

The increase in interest expense for 2020 versus 2019 was primarily due to increased borrowings under our revolving credit facility during 2020.

The decrease in interest expense in 2019 compared to 2018 was primarily due to interest income earned on investments held in money market accounts.

Amortization of deferred financing costs within interest expense was $ 0.8 million in 2020 and $ 1.0 million in both 2019 and 2018.

The increase in interest expense in 2021 versus 2020 was driven by increased borrowings under our revolving credit facility and new term loan during 2021 primarily to finance the acquisition of HCS-Electronic Materials.

The increase in interest expense in 2020 compared to 2019 was driven by increased borrowings under our revolving credit facility during 2020 primarily to finance the acquisition of Optics Balzers.

Amortization of deferred financing costs within interest expense was $ 1.0 million in 2021, $ 0.8 million in 2020, and $ 1.0 million in 2019.

Note H — Income Taxes

Certain amounts below have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as described in Note A.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law.

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations.

The Company has examined the impact of the CARES Act on its business and has determined it does not have a material impact to its consolidated financial statements.

On July 9, 2020, the U.S.

Treasury Department issued final tax regulations related to the foreign-derived intangible income and global intangible low-taxed income (GILTI) provisions.

Treasury Department also released final tax regulations on July 20, 2020 permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax.

On December 31, 2020, the U.S.

Treasury Department issued final tax regulations for certain employee renumeration in excess of $1 million under IRC Section 162(m).

The Company has applied the new legislation to its consolidated financial statements.

On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA) was enacted in the United States.

The SEC staff issued Staff Accounting Bulletin No.

118 (SAB 118) to address the application of U.S.

GAAP in situations where a registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJA.

The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the TCJA in 2017 and 2018.

The Company completed its accounting for all of the enactment-date income tax effects of the TCJA in the fourth quarter of 2018.

During 2018, the Company recognized adjustments to the provisional amounts recorded as of December 31, 2017 and included the adjustments as a component of income tax expense.

In 2018, the Company recorded a $ 11.1 million net tax benefit related to the enactment-date effects of the TCJA, including a $ 2.8 million tax benefit for the re-measurement of deferred tax assets and liabilities, a $ 1.2 million tax benefit for the one-time transition tax on the mandatory deemed repatriation of foreign earnings, and a $ 7.1 million tax benefit related to the generation of foreign tax credits and the reversal of the valuation allowance related to foreign tax credits.

Income before income taxes and income tax expense (benefit) are comprised of the following:

On March 11, 2021, President Biden signed the American Rescue Plan (the Rescue Plan) into law.

The Rescue Plan, among other things, extended and enhanced a number of current-law tax incentives for businesses.

The Company has examined the impact of the Rescue Plan on its business and has determined it does not have a material impact to its consolidated financial statements.

Income (loss) before income taxes and income tax expense (benefit) are comprised of the following:

(Thousands) 2021 2020 2019

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Foreign 22,641 9,428 5,265

Total income before income taxes $ 8,275 $ 65,536 $ 16,598

Total income (loss) before income taxes $ 77,325 $ 8,275 $ 65,536

Income tax expense:

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Total deferred $ ( 12,957 ) $ ( 9,850 ) $ 3,945

Total income tax (benefit) expense $ ( 7,187 ) $ 12,142 $ ( 4,446 )

Total income tax expense (benefit) $ 4,851 $ ( 7,187 ) $ 12,142

A reconciliation of the U.S.

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Effect of excess of percentage depletion over cost depletion ( 3.4 ) ( 43.0 ) ( 4.3 )

Manufacturing production deduction, including impact of NOL carryback — — 6.2

Foreign derived intangible income deduction ( 2.3 ) ( 1.8 ) ( 3.0 )

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Environmental reserves 1,358 1,301

Revenue recognition 5,027 —

Lease liabilities 11,639 10,469

Interest expense carryforward 14,163 —

Pensions 1,393 7,456

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Net operating loss and credit carryforwards 11,423 12,711

Research and development tax credit carryforward 26 25

Subtotal 58,291 39,732

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Mine development ( 917 ) ( 1,669 )

Unrealized gains

Total deferred tax liabilities ( 75,119 ) ( 38,328 )

Net deferred tax liabilities $ ( 21,785 ) $ ( 12,730 )

The Company had deferred income tax assets offset with a valuation allowance for certain foreign and state net operating losses, state investment and research and development tax credit carryforwards, and deferred tax assets that are not likely to be realized for several of the Company's controlled foreign corporations.

The Company had deferred income tax assets offset with a valuation allowance for certain foreign and state net operating losses, a domestic capital loss carryforward, state investment and research and development tax credit carryforwards, and deferred tax assets that are not likely to be realized for certain of the Company's controlled foreign corporations.

The Company intends to maintain a valuation allowance on these deferred tax assets until a realization event occurs to support reversal of all or a portion of the allowance.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

As of December 31, 2021, the Company came out of a three year cumulative loss in Germany in the fourth quarter due to improving profitability.

Management determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes are realizable and released the related $ 6.9 million valuation allowance on deferred tax assets in Germany, resulting in an income tax benefit for this amount.

At December 31, 2021, for income tax purposes, the Company had foreign net operating loss carryforwards of $ 20.8 million that do not expire, and $ 6.7 million that expire in calendar years 2022 through 2027.

The Company also had state net operating loss carryforwards of $ 20.5 million that expire in calendar years 2021 through 2040 and state tax credits of $ 3.7 million that expire in calendar years 2021 through 2035.

A valuation allowance of $ 9.5 million has been provided against certain foreign and state net operating loss carryforwards and state tax credits due to uncertainty of their realization.

The Company had state net operating loss carryforwards of $ 24.5 million that expire in calendar years 2022 through 2040 and state tax credits of $ 4.2 million that expire in calendar years 2022 through 2036.

The Company also had a capital loss carryforward of $ 8.4 million that expires in 2026.

A valuation allowance of $ 5.0 million has been provided against certain foreign and state net operating loss carryforwards, a U.S.

capital loss carryforward, and state tax credits due to uncertainty of their realization.

The Company files income tax returns in the U.S.

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The tax holiday is conditional upon our meeting certain employment, sales, and investment thresholds.

The impact of this holiday decreased foreign taxes by $ 0.5 million in 2020.

The benefit of the tax holiday on net income per share (diluted) was $ 0.03 in 2020.

A reconciliation of the Company’s unrecognized tax benefits (excluding interest and penalties) for the year-to-date periods ended December 31, 2020 and 2019 is as follows:

The impact of this tax holiday decreased foreign taxes by $ 0.4 million and $ 0.5 million in 2021 and 2020, respectively.

The benefit of the tax holiday on net income per share (diluted) was $ 0.02 and $ 0.03 in 2021 and 2020, respectively.

A reconciliation of the Company’s unrecognized tax benefits for the year-to-date periods ended December 31, 2021 and 2020 is as follows:

(Thousands) 2021 2020

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Balance at December 31 $ 1,142 $ 2,360

Included in the balance as of December 31, 2020 and December 31, 2019 are $ 2.7 million and $ 2.4 million, respectively, of unrecognized tax benefits that would impact the Company’s effective tax rate if recognized.

We believe it is reasonably possible that a decrease of up to $ 1.6 million of unrecognized tax benefits related to federal exposures may be recognized in the next twelve months as a result of the lapse of the statute of limitations.

Included in the balance of unrecognized tax benefits, including interest and penalties, as of December 31, 2021 and December 31, 2020 are $ 1.2 million and $ 2.7 million, respectively, of tax benefits that would affect the Company’s effective tax rate if recognized.

It is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months;

however, we do not expect the change to have a material impact on the Consolidated Statements of Income or the Consolidated Balance Sheets.

The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Income.

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No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations as of December 31, 2021.

The amount of such unrepatriated earnings totaled $ 98.4 million as of December 31, 2020.

The amount of such unrepatriated earnings totaled $ 102.3 million as of

December 31, 2021.

It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.

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Diluted EPS $ 3.50 $ 0.75 $ 2.59

* Amounts for the years ended December 31, 2019 and 2018 have been adjusted to reflect the change in inventory accounting method, as described in Note A .

Equity awards covering shares of common stock totaling 55,598 in 2021, 166,255 in 2020, and 71,199 in 2019 were excluded from the diluted EPS calculation as their effect would have been anti-dilutive.

Note J — Inventories, net

Inventories are stated at the lower of cost or net realizable value.

In the fourth quarter of 2020, the Company voluntarily changed its method of inventory costing for the majority of its domestic inventories to the FIFO method from the LIFO method.

The Company believes that the FIFO method is preferable as it results in uniformity across the Company's global operations, provides better matching of revenues and expenses, and improves comparability with the Company's peers.

Inventories in the Consolidated Balance Sheets are summarized as follows:

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Inventories, net 361,115 250,778

* December 31, 2019 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A.

The Company takes and records the results of a physical inventory count of its precious metals on a quarterly basis.

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The notional value of off-balance sheet precious metals and copper was $ 480.2 million as of December 31, 2021 versus $ 400.0 million as of December 31, 2020.

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.

Note K — Property, Plant, and Equipment

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Unearned income was reduced b y $ 4.3 million in both 2021 and 2020 a nd $ 4.4 million in 2019 and credited to cost of sales in the Consolidated Statements of Income, offsetting the impact of the depreciation expense on the associated equipment on the Company's cost of sales and gross margin.

We recorded depreciation and depletion expense o f $ 30.9 million i n 2020, $ 30.3 million in 2019, and $ 33.3 million in 2018.

Depreciation, depletion, and amortization as shown on the Consolidated Statement of Cash Flows is also net of the reduction in the unearned income liability in 2020, 2019, and 2018.

We recorded depreciation and depletion expense of $ 31.4 million i n 2021, $ 30.9 million in 2020, and $ 30.3 million in 2019.

Depreciation, depletion, and amortization as shown on the Consolidated Statement of Cash Flows is net of the reduction in the unearned income liability in 2021, 2020, and 2019.

The net carrying value of capitalized so ftware w as $ 5.4 million and $ 5.0 million at December 31, 2021 and December 31, 2020, respectively.

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The Company entered into investment and master supply agreements with a customer to procure equipment to manufacture product for the customer.

The customer will make prepayments to the Company in the amount of approximately $ 70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer.

The customer provided prepayments to the Company 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 December 31, 202 0, $ 58.8 million of prepayments are classified as Unearned income in the Consolidated Balance Sheet and the liabilities are expected to be settled as commercial shipments are made.

The prepayment from the customer will be applied when the product is sold and delivered to the customer in connection with a master supply agreement.

Accordingly, as of December 31, 2021 and 2020, $ 72.6 million and $ 58.8 million, respectively, of prepayments are classified as Unearned income in the Consolidated Balance Sheet and the liabilities are expected to be settled as commercial shipments are made.

Note M — Leasing Arrangements

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The discount rate implicit within the leases is generally not determinable, and, therefore, the Company determines the discount rate based on its incremental borrowing rate.

The incremental borrowing rate for leases is determined based on the lease term in which lease payments are made, adjusted for impacts of collateral.

The incremental borrowing rate for leases is determined based on the lease term over which lease payments are made, adjusted for the impact of collateral.

The components of operating and finance lease cost for 2021 and 2020 were as follows:

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Total lease cost $ 14,823 $ 12,947

Operating lease expense under ASC 840 amounted to $ 11.6 million during 2018.

The Company straight-lines its expense of fixed payments for operating leases over the lease term and expenses the variable lease payments in the period incurred.

These variable lease payments are not included in the calculation of right-of-use assets or lease liabilities.

Supplemental balance sheet information related to the Company's operating and finance leases as of December 31, 2020 and 2019 was as follows:

Supplemental balance sheet information related to the Company's operating and finance leases as of December 31, 2021 and 2020 is as follows:

(Thousands, except lease term and discount rate) 2021 2020

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Total present value of lease payments $ 19,127 $ 65,005

$ 23,464 $ 63,669

Supplemental cash flow information related to leases was as follows:

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Total $ 190,702 $ ( 37,573 ) $ 153,129 $ 109,603 $ ( 56,903 ) $ 52,700

During 2020, the Company acquired $ 40.1 million in customer relationships with a useful life of eighteen years , as well as $ 4.1 million in technology and $ 5.1 million in other intangible assets, both of which have a five years useful life.

During 2021, the Company acquired $ 50.2 million in customer relationships with a useful life of 13 years and $ 35.3 million in technology with a useful life of 13 years, as well as a $ 22.3 million trade name with a useful life of 15 years related to the HCS-Electronic Materials acquisition.

During 2020, the Company accelerated amortization on $ 26.2 million of intangible assets for its LAC business that was shut down on December 31, 2020.

These assets were fully amortized as of December 31, 2020 and fully written off in 2021 with no impact to the Consolidated Statements of Income in 2021.

Amortization expense for 2021, 2020, and 2019 was $ 6.0 million, $ 2.4 million, and $ 1.4 million, respectively.

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Intangible assets also includes deferred financing costs relating to the Company's revolving credit and consignments lines of $ 3.6 million and $ 2.0 million at December 31, 2021 and 2020 , respectively.

In 2020, the Company acquired Optics Balzers for a total purchase price of $ 136.1 million, including the assumption of debt, and recorded goodwill of $ 70.6 million.

Optics Balzers is included in the Precision Optics segment.

In 2021, the Company acquired HCS-Electronic Materials for a total purchase price of $ 395.9 million, and recorded goodwill of $ 178.2 million.

Goodwill of $ 154.3 million and $ 23.9 million associated with the HCS-Electronic Materials acquisition was allocated to the Advanced Materials and Performance Alloys and Composites segments, respectively.

The balance of goodwill at December 31, 2021 and 2020 was $ 318.6 million and $ 144.9 million, respectively.

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Balance at December 31, 2019 $ 1,899 $ 50,190 $ 26,922 $ 79,011

Acquisition — — 70,577 70,577

Impairment charge — — ( 9,053 ) ( 9,053 )

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Balance at December 31, 2021 $ 25,803 204,520 $ 88,297 $ 318,620

In 2019, the Company recorded a $ 11.6 million goodwill impairment charge to record an initial impairment charge for the LAC reporting unit that was determined to have a fair value below the carrying value of the assets for the reporting unit.

In 2020, the Company recorded a $ 9.1 million goodwill impairment charge to write-off the remaining balance of goodwill for the LAC reporting unit which was closed as of December 31, 2020.

See Note E for additional details of the restructuring plan.

During the third quarter of 2019, the LAC reporting unit began to experience a decline in sales volume from a significant customer.

Based on an assessment that the decline in sales volume was expected to continue, the Company initiated a restructuring plan at the end of the third quarter to reduce the LAC reporting unit’s cost structure.

Refer to Note E for further details of the restructuring plan.

The Company considered these factors to be impairment indicators.

As a result, the Company performed an interim impairment analysis as of September 27, 2019 using a "step one" quantitative assessment for the LAC reporting unit.

The LAC reporting unit prepared an operating forecast that included several assumptions including future sales growth from new products and applications, as well as assumptions regarding future industry-specific market conditions, capital expenditures, and working capital changes.

In addition to the estimates of future cash flows, other significant estimates involved in the determination of fair value of the reporting unit were the weighted average cost of capital (discount rate), annual growth rate, and terminal growth rate used in the discounted cash flow (DCF) model.

The discount rates used in the DCF model consider market and industry data as well as specific risk premiums for the LAC reporting unit.

The Company first reviewed long-lived assets, which resulted in an impairment charge of $ 2.6 million in the third quarter of 2019.

The Company then performed a goodwill impairment analysis which resulted in an $ 11.6 million charge in the third quarter of 2019, which represents the excess of the carrying value over the estimated fair value of LAC.

The Company estimated fair value using a discounted cash flow analysis for goodwill and estimated market values for other assets.

These non-cash charges relating to goodwill and other assets were recorded in Goodwill impairment charges and Asset impairment charges, respectively, in the Consolidated Statements of Income.

The results of the Company's 2021 , 2020 , and 2019 annual goodwill impairment assessments indicated that no other goodwill impairment existed.

Accumulated impairment losses were $ 20.6 million and $ 11.6 million at December 31, 2020 and 2019, respectively, all of which related to the LAC reporting unit.

There were no accumulated impairment losses in 2021, compared to $ 20.6 million at December 31, 2020 , all of which related to the LAC reporting unit.

Note O — Debt

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Borrowings under Credit Agreement with average interest rate of 2.12 % at December 31, 2021

$ 152,296 $ 34,000

Borrowings under the Term Loan Facility 300,000 —

Foreign debt 2,252 3,157

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Maturities on long-term debt instruments as of December 31, 2021 are as follows:

2022 $ 15,359

2027 and thereafter 492

Total $ 454,548

In September 2019, the Company amended and restated the agreement governing its $ 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.

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 $ 200.0 million.

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.

In 2021, the Company amended and restated 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.

On November 1, 2021, Materion borrowed the full $ 300 million available under the delayed draw term loan facility and used the proceeds to pay a portion of the purchase price of the HCS-Electronic Materials acquisition.

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 metals, 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 Credit Agreement.

The Company borrowed $ 150.0 million under the Credit Agreement during 2020 as a precaution in light of the COVID-19 pandemic.

A portion of the amount borrowed was used to fund the Optics Balzers acquisition.

At December 31, 2020, there was $ 34.0 million outstanding under this Credit Agreement.

No amounts were outstanding at December 31, 2019.

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

The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases.

In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio.

The Company was in compliance with all of its debt covenants as of December 31, 2020 and December 31, 2019.

At December 31, 2020 and 2019 there was $ 48.1 million and $ 41.8 million outstanding against the letters of credit sub-facility, respectively.

The Company pays a variable commitment fee that may reset quarterly ( 0.2 % as of December 31, 2020) of the available and unborrowed amounts under the revolving credit line.

The available borrowings under the individual existing credit lines total $ 245.8 million as of December 31, 2020.

In April 2011, the Company entered into an agreement with the Toledo-Lucas County Port Authority and the Dayton–Montgomery County Port Authority in Ohio to co-issue $ 8.0 million in taxable development revenue bonds, with a fixed amortization term that will mature in 2021.

The interest rate on these bonds was fixed at 4.90 %, and the unamortized balance of the bonds was $ 1.3 million and $ 2.2 million at December 31, 2020 and 2019, respectively.

In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum 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 up to $ 25 million can benefit the covenants and may benefit the borrowing capacity under the Credit Agreement.

At December 31, 2021 and 2020, there was $ 452.3 million and $ 34.0 million outstanding under the Credit Agreement, respectively.

At December 31, 2021 and 2020 there was $ 46.3 million and $ 48.1 million letters of credit outstanding against the credit sub-facility, respectively.

The Company pays a variable commitment fee that may reset quarterly ( 0.35 % as of December 31, 2021) on the available and unborrowed amounts under the revolving credit line.

The available borrowings under the individual existing credit lines totaled $ 176.4 million as of December 31, 2021.

Note P — Pensions and Other Post-Employment Benefits

The obligation and funded status of the Company’s pension and other post-employment benefit plans are shown below.

The Pension Benefits column aggregates defined benefit pension plans in the U.S., Germany, Liechtenstein, and England, and the U.S.

The Pension Benefits column aggregates defined benefit pension plans in the U.S., Germany, Liechtenstein, England, and the U.S.

supplemental retirement plans.

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Plan amendments — ( 799 ) — —

Actuarial loss (gain) 24,259 20,409 224 ( 2,192 )

Actuarial (gain) loss ( 8,448 ) 24,259 ( 112 ) 224

Benefit payments ( 4,927 ) ( 4,612 ) ( 742 ) ( 989 )

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Net amount recognized $ ( 8,439 ) $ ( 19,931 ) $ ( 7,514 ) $ ( 8,190 )

The benefit obligation increased in 2020 primarily due to the Optics Balzers acquisition, as well as actuarial losses that were driven by decreases in the discount rate as well as participant census data updates.

The benefit obligation decreased in 2021 due to actuarial gains that were driven by increases in the discount rate as well as participant census data updates.

In 2019, the Company's Board of Directors approved changes to the U.S.

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Net prior service cost (credit) ( 695 ) ( 799 ) ( 2,054 ) ( 3,552 )

Net transition obligation/(asset) 637 — — —

Net amount recognized $ 42,382 $ 48,673 $ ( 6,098 ) $ ( 7,525 )

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defined benefit plan effective January 1, 2020.

Net benefit cost for 2018 includes settlement charges of $ 41.4 million primarily related to the remeasurement of the periodic benefit obligation of the U.S.

plans in conjunction with the purchase of a group annuity contract from Mutual of America.

Components of net periodic benefit cost, other than service cost, are included in Other non-operating (income) expense in the Consolidated Statements of Income.

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Rate of Compensation Increase.

The rate of compensation increase assumption was not applicable for the domestic defined benefit plan in 2019 due to the Company freezing the plan effective January 1, 2020.

The rate of compensation assumption for the domestic retiree medical plan was 3.0 % in 2020 and 4.0 % in 2019 for both the domestic defined benefit pension plan and the domestic retiree medical plan.

The rate of compensation increase assumption is no longer applicable for the domestic defined benefit due to the Company freezing the plan effective January 1, 2020.

The rate of compensation assumption for the domestic retiree medical plan was 3.0 % in both 2021 and 2020.

Assumptions for the defined benefit pension plans in Germany, Liechtenstein, and England are determined separately from the U.S.

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In addition to the plans shown above, the Company also has certain foreign subsidiaries with accrued unfunded pension and other post-employment arrangements.

The liability for these arrangements was $ 1.7 million at December 31, 2020 and $ 1.4 million at December 31, 2019, and was included in retirement and post-employment benefits in the Consolidated Balance Sheets.

The liability for these arrangements was $ 1.1 million at December 31, 2021 and $ 1.7 million at December 31, 2020, and was included in retirement and post-employment benefits on the Consolidated Balance Sheets.

The Company also sponsors defined contribution plans available to substantially all U.S.

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Balance at December 31, 2021 $ 2,348 $ 72 $ — $ 2,420 $ ( 39,702 ) $ ( 2,887 ) $ ( 40,169 )

Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of Income while gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income.

Reclassifications of gains and losses on foreign currency cash flow hedges from accumulated other comprehensive income are recorded in Net sales in the Consolidated Statements of Income while gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income.

Refer to Note S for additional details on cash flow hedges.

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Note R — Stock-based Compensation

Stock incentive plans (the 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan) were approved at the May 2006 annual meeting of shareholders.

The Company maintains two stock incentive plans (the 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan) that have been approved by its shareholders.

These plans authorize the granting of option rights, stock appreciation rights (SARs), performance-restricted shares, performance shares, performance units, restricted shares, and restricted stock units (RSUs).

The 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan were amended to, among other things, add additional shares to the plans.

These amendments were last approved by shareholders at the May 2017 annual meeting.

Stock-based compensation expense, which includes awards settled in shares and in cash and is recognized as a component of selling, general, and administrative (SG&A) expenses, was $ 7.3 million, $ 5.7 million, and $ 11.1 million in 2021, 2020, and 2019, respectively.

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As of December 31, 2021, $ 1.1 million of expense with respect to non-vested SARs has yet to be recognized as expense over a weighted-average period of approximately 20 months.

The total fair value of shares vested during 2020 was $ 1.5 million, compared to $ 1.9 million in both 2019 and 2018.

The total fair value of shares vested during 2021, 2020, and 2019 was $ 0.8 million, $ 1.5 million, and $ 1.9 million, respectively.

The weighted-average grant date fair value for 2021, 2020, and 2019 was $ 20.66 , $ 13.67 , and $ 17.76 , respectively.

The fair value will be amortized to compensation cost on a straight-line basis over the vesting period of three years , or earlier if the employee is retirement eligible as defined in the Plan.

Stock-based compensation expense relating to SARs was $ 0.9 million in both 2020 and 2019 and $ 0.7 million in 2018.

The fair value will be amortized to compensation cost on a straight-line basis over the vesting period of three years , or earlier if the employee is retirement eligible and continued vesting is approved by the Board of Directors as defined in the Plan.

Stock-based compensation expense relating to SARs was $ 0.9 million in each of the last three years.

The fair value of the SARs was estimated on the grant date using the Black-Scholes pricing model with the following assumptions:

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The vesting period is typically three years unless the recipient is retirement eligible and continued vesting is approved by the Board of Directors.

The fair value of the RSUs settled in stock is based on the closing stock price on the date of grant.

The fair value of RSUs settled in stock is based on the closing stock price on the date of grant.

The weighted-average grant date fair value for 2021, 2020, and 2019 was $ 68.62 , $ 51.55 , and $ 58.33 , respectively.

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The unamortized compensation cost on the outstanding RSUs was $ 4.6 million as of December 31, 2021 and is expected to be recognized over a weighted-average period of 23 months.

The total fair value of shares vested during both 2020 and 2019 was $ 1.2 million, compared to $ 1.4 million in 2018.

The total fair value of shares that vested during 2021 was $ 2.0 million, compared to $ 1.2 million in both 2020 and 2019.

The following table summarizes the stock-settled RSU activity during 2021:

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In 2021, 2020, and 2019, 9,904 , 15,976 , and 11,048 RSUs, with a one year vesting period, were granted to certain non-employee members of the Board of Directors.

The weighted-average grant date fair value of these RSUs were $ 48.42 , $ 68.79 , and $ 51.60 in 2020, 2019, and 2018, respectively.

The Company recognized $ 0.7 million of expense with respect to these awards in each of the last three years.

The weighted-average grant date fair value of these RSUs was $ 75.77 , $ 48.42 , and $ 68.79 in 2021, 2020, and 2019, respectively.

The Company recognized $ 0.8 million of expense related to these awards in 2021, compared to $ 0.7 million of expense in both 2020, and 2019.

At December 31, 2021, $ 0.3 million of expense with respect to non-vested RSU awards granted to the Board of Directors has yet to be recognized and will be amortized into expense over a weighted-average period of approximately four months .

Long-term Incentive Plans.

Under long-term incentive compensation plans, executive officers and selected other employees receive restricted stock unit awards based upon the Company’s performance over the defined period, typically three years .

Under the long-term incentive compensation plans, executive officers and selected other employees receive restricted stock unit awards based upon the Company’s performance over the defined period, typically three years .

Total units earned for grants made in 2021, 2020, and 2019, may vary between 0 % and 200 % of the units granted based on the attainment of performance targets during the related three-year period.

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Vesting of performance-based awards is contingent upon the attainment of threshold performance objectives.

The following table summarizes the activity related to equity-based, performance-based RSUs during 2020:

The following table summarizes the activity related to performance-based RSUs during 2021:

(Shares in thousands) Number of

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

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets at December 31, 2020 and 2019:

The following table summarizes the financial instruments measured at fair value on the Consolidated Balance Sheets at December 31, 2021 and 2020:

Fair Value Measurements

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Foreign Currency.

The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen.

The Company sells a portion of its products to overseas customers in their local currencies, primarily in euro and yen.

The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions.

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

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 use of forward contracts locks in a firm rate and eliminates any downside risk from an adverse rate movement as well as any benefit from a favorable rate movement.

The Company may from time to time choose to hedge with options or a tandem of options known as a collar.

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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.

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 that changes in prices could have on the Company's margins and operating profit.

The consigned metal is owned by financial institutions who charge the Company a financing fee based upon the current value of the metal on hand.

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These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans.

Other-net included foreign currency gains relating to these derivatives of $ 2.7 million in 2020, primarily due to a gain realized on the settlement of a foreign currency hedge for the purchase of Optics Balzers.

In 2019, Other-net included $ 0.1 million of foreign currency losses relating to these derivatives.

Other-net included foreign currency gains related to these derivatives of $ 1.2 million in 2021, compared to $ 2.7 million of foreign currency gains in 2020.

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 at December 31, 2021 and 2020:

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35,129 1,349 8,380 759

Precious metal swaps — — 157 1

Foreign currency forward contracts - yen 143 2 — —

Other liabilities and accrued items

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Other long-term liabilities

Precious metal swaps — — 149 5

Foreign currency forward contracts - euro 1,143 8 — —

Total $ 38,575 $ 1,319 $ 36,068 $ ( 765 )

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No ineffectiveness expense was recorded in 2021, 2020, or 2019.

The fair value of derivative contracts recorded in accumulated other comprehensive loss totaled $ 0.8 million and $ 0.7 million as of December 31, 2020 and December 31, 2019, respectively.

Deferred losses of $ 0.8 million at December 31, 2020 are expected to be reclassified to earnings within the next 18-month period.

The fair value of derivative contracts recorded in accumulated other comprehensive income (loss) totaled $ 1.3 million and $ 0.8 million as of December 31, 2021 and December 31, 2020, respectively.

Deferred gains of $ 1.3 million at December 31, 2021 are expected to be reclassified to earnings within the next 18-month period.

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 for years ended December 31, 2021 and 2020:

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Defense and indemnity costs were less than or equal to the deductible in both 2021 and 2020.

As of December 31, 2020, the Company was a defendant in two beryllium litigation cases, one of which was outstanding as of December 31, 2019.

As of December 31, 2021, the Company was a defendant in two beryllium litigation cases, both of which were outstanding as of December 31, 2020.

The Company does not expect the resolution of these matters to have a material impact on its consolidated financial statements.

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The Company is unable to estimate its potential exposure to unasserted claims.

Based upon currently known facts and assuming collectibility of insurance, the Company does not believe that resolution of the current or any potential future beryllium proceedings will have a material adverse effect on the financial condition or cash flow of the Company.

Based upon currently known facts and assuming collectability of insurance, the Company does not believe that resolution of the current or any potential future beryllium proceedings will have a material adverse effect on the financial condition or cash flow of the Company.

However, the Company’s results of operations could be materially affected by unfavorable results in one or more cases.

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The Company’s environmental engineers perform routine ongoing analyses of the remediation sites and will use outside consultants to assist in their analyses from time to time.

Accruals are based upon their analyses and are established based on the reasonably estimable loss or range of loss.

Reserve accruals are based upon their analyses and are established based on the reasonably estimable loss or range of loss.

The accruals are revised for the results of ongoing studies, changes in strategies, inflation, and for differences between actual and projected costs.

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The environmental reserves recorded represent the Company's best estimate of what is reasonably possible and cover existing or currently foreseen projects based upon current facts and circumstances.

The Company does not believe that it is reasonably possible that the cost to resolve environmental matters for sites where the investigative work and work plan development are substantially complete will be materially different than what has been accrued while the ultimate loss contingencies for sites that are in the preliminary stages of investigation cannot be reasonably determined at the present time.

For sites where the investigative work and work plan development are substantially complete, the Company does not believe that it is reasonably possible that the cost to resolve environmental matters will be materially different than what has been accrued.

For sites that are in the preliminary stages of investigation, the ultimate loss contingencies cannot be reasonably determined at the present time.

As facts and circumstances change, the ultimate cost may be revised, and the recording of additional costs may be material in the period in which the additional costs are accrued.

The Company does not believe that the ultimate liability for environmental matters will have a material impact on its financial condition or liquidity due to the nature of known environmental matters and the extended period of time during which environmental remediation normally takes place.

The Company does not believe that the ultimate liability for environmental matters will have a material impact on its financial condition or liquidity due to the nature of known environmental matters and the extended period of time over which environmental remediation normally takes place.

The undiscounted reserve balance at the beginning of the year, the amounts expensed and paid, and the balance at December 31, 2021 and 2020 are as follows:

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Other long-term liabilities 4,231 4,631

The majority of spending in both 2020 and 2019 was for various remediation projects at the Elmore, Ohio plant site.

The majority of expenses in both 2021 and 2020 was for various remediation projects at the Elmore, Ohio plant site.

Asset Retirement Obligations

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(collectively, the Company).

Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law.

Plaintiff also alleges the Company failed to include all remuneration he and others received for premium and bonus pay when computing overtime pay.

The case is currently in the preliminary stages.

The Company believes that it has substantive defenses and intends to vigorously defend this suit.

At December 31, 2020, the Company had outstanding letters of credit totalin g $ 48.1 million related to workers’ compensation, consigned precious metal guarantees, environmental remediation issues, and other matters.

Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges that he and other similarly situated employees 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 remains in the preliminary stages while the parties explore a negotiated resolution.

The Company believes that it has substantive defenses and intends to vigorously defend this suit absent a negotiated resolution.

At December 31, 2021, the Company had outstanding letters of credit totaling $ 46.3 million related to workers’ compensation, consigned precious metal guarantees, environmental remediation issues, and other matters.

The majority of the Company's outstanding letters of credit expire in 2022 and are expected to be renewed.

Note U — Quarterly Data (Unaudited)

The following tables summarize selected quarterly financial data for the years ended December 31, 2020 and 2019:

(Thousands except per share amounts) First

Quarter* Second

Quarter* Third

Quarter* Fourth

Quarter Total

Net sales $ 277,946 $ 271,468 $ 287,171 $ 339,689 $ 1,176,274

Gross margin 44,570 46,955 45,311 55,797 192,633

Percent of net sales 16.0 % 17.3 % 15.8 % 16.4 % 16.4 %

Net (loss) income (1)

$ ( 3,878 ) $ 5,803 $ 5,471 $ 8,066 $ 15,462

Net (loss) income per share of common stock:

Basic $ ( 0.19 ) $ 0.29 $ 0.27 $ 0.40 0.76

( 0.19 ) 0.28 0.27 0.39 0.75

Quarter* Second

Quarter* Third

Quarter* Fourth

Quarter* Total

Net sales $ 301,441 $ 297,843 $ 305,979 $ 280,161 $ 1,185,424

Gross margin 69,606 71,997 66,605 54,482 262,690

Percent of net sales 23.1 % 24.2 % 21.8 % 19.4 % 22.2 %

Net income (3)

$ 17,133 $ 17,393 $ 4,522 $ 14,346 $ 53,394

Net income per share of common stock:

Basic $ 0.85 $ 0.85 $ 0.22 $ 0.70 $ 2.62

Diluted 0.83 0.84 0.22 0.69 2.59

(1) The net loss for the first quarter of 2020 includes the impact of $ 10.8 million of non-cash impairment charges.

See Note N for additional information.

(2) Since the Company reported a net loss for the first quarter of 2020, the effect of potential common shares were excluded from diluted earnings per share, as their inclusion would have been anti-dilutive.

(3) Net income for the third quarter of 2019 includes the impact of $ 14.1 million of non-cash impairment charges.

For additional information refer to Note N.

* Certain amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A.

The Company follows a 13-week quarterly accounting cycle pursuant to which the first three fiscal quarters end on a Friday and the fiscal year always ends on December 31.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data