MATERION Corp 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements Page Management’s Report on Internal Control over Financial Reporting 37 Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 38 Consolidated Statements of Income for the Years Ended December 31, 2021, 2020, and 2019 42 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020, and 2019 43 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020, and 2019 44 Consolidated Balance Sheets as of December 31, 2021 and 2020 45 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2021, 2020, and 2019 46 Notes to Consolidated Financial Statements 47 Schedule II - Valuation and Qualifying Accounts 89 36 Management’s Report on Internal Control over Financial Reporting The management of Materion Corporation and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Materion Corporation and subsidiaries’ internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Materion Corporation and subsidiaries’ management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. 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 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. The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report. 37 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Materion Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Materion Corporation and subsidiaries (the Company) 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) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. 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. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 38 Reconciliation of Precious Metals Consignment Inventory Description of the matter At December 31, 2021, the notional value of the Company’s off-balance sheet precious metals was $480.2 million. As discussed in Note J to the consolidated financial statements, the Company uses estimates to measure the precious metal content within various refinement streams which can vary over time based upon the input materials, yield rates, and other process parameters. Auditing the reconciliation of precious metals consignment inventory is complex due to the highly detailed nature of the inventory reconciliation and the amount of information that is obtained from third parties. A physical inventory is performed by the Company on a quarterly basis to verify the existence of inventory. The precious metals inventory reconciliation includes estimates 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 refine vendors, and other factors. The reconciliation of precious metals consignment inventory presents the resulting calculated weight of the precious metals generated from these estimates within the Company’s refine operations. This calculated weight may differ from what the Company’s records indicate should be on hand, which would then result in an adjustment to pre-tax income. 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 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, 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. Accounting for Business Combinations Description of the matter 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 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 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 We have served as the Company’s auditor since at least 1958, but we are unable to determine the specific year. Cleveland, Ohio February 17, 2022 39 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Materion Corporation Opinion on Internal Control over Financial Reporting We have audited Materion Corporation and subsidiaries’ 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) (the COSO criteria). 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 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. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Cleveland, Ohio February 17, 2022 40 Materion Corporation and Subsidiaries Years Ended December 31, 2021, 2020, and 2019 Consolidated Statements of Income (Thousands except per share amounts) 2021 2020 2019 Net sales $ 1,510,644 $ 1,176,274 $ 1,185,424 Cost of sales 1,226,882 983,641 922,734 Gross margin 283,762 192,633 262,690 Selling, general, and administrative expense 163,777 133,963 147,164 Research and development expense 26,575 20,283 18,271 Goodwill impairment charges (Note N) — 9,053 11,560 Asset impairment charges (Note N) — 1,419 2,581 Restructuring (income) expense (Note E) ( 438 ) 11,237 785 Other — net (Note F) 16,737 8,463 11,783 Operating profit 77,111 8,215 70,546 Other non-operating (income) expense — net (Note P) ( 5,115 ) ( 3,939 ) 3,431 Interest expense — net (Note G) 4,901 3,879 1,579 Income before income taxes 77,325 8,275 65,536 Income tax expense (benefit) (Note H) 4,851 ( 7,187 ) 12,142 Net income $ 72,474 $ 15,462 $ 53,394 Basic earnings per share: Net income per share of common stock $ 3.55 $ 0.76 $ 2.62 Diluted earnings per share: Net income per share of common stock $ 3.50 $ 0.75 $ 2.59 Weighted-average number of shares of common stock outstanding: Basic 20,422 20,338 20,365 Diluted 20,689 20,603 20,655 The accompanying notes are an integral part of the consolidated financial statements. 41 Materion Corporation and Subsidiaries Years Ended December 31, 2021, 2020, and 2019 Consolidated Statements of Comprehensive Income (Thousands) 2021 2020 2019 Net income $ 72,474 $ 15,462 $ 53,394 Other comprehensive income: Foreign currency translation adjustment ( 6,904 ) 9,030 ( 421 ) 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 The accompanying notes are an integral part of the consolidated financial statements. 42 Materion Corporation and Subsidiaries Years Ended December 31, 2021, 2020, and 2019 Consolidated Statements of Cash Flows (Thousands) 2021 2020 2019 Cash flows from operating activities: Net income $ 72,474 $ 15,462 $ 53,394 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 44,137 42,384 41,116 Amortization of deferred financing costs in interest expense 967 790 962 Stock-based compensation expense (non-cash) 6,517 5,528 7,170 Amortization of pension and post-retirement costs 437 ( 151 ) 386 (Gain) loss on sale of property, plant, and equipment ( 282 ) 466 344 Deferred income tax (benefit) expense ( 12,957 ) ( 9,850 ) 3,945 Impairment charges — 10,472 14,141 Net pension curtailments and settlements — 94 3,328 Changes in assets and liabilities, net of acquired assets and liabilities: Decrease (increase) in accounts receivable ( 30,490 ) ( 707 ) ( 23,933 ) Decrease (increase) in inventory ( 43,458 ) ( 1,288 ) 20,485 Decrease (increase) in prepaid and other current assets ( 3,855 ) 2,475 869 Increase (decrease) in accounts payable and accrued expenses 40,219 ( 21,877 ) ( 18,575 ) Increase (decrease) in unearned revenue 106 2,935 ( 2,538 ) Increase (decrease) in interest and taxes payable ( 220 ) ( 157 ) ( 805 ) Increase (decrease) in unearned income due to customer prepayments 13,752 54,103 4,733 Domestic pension plan contributions — — ( 4,500 ) Other — net 2,894 378 ( 1,300 ) Net cash provided by operating activities 90,241 101,057 99,222 Cash flows from investing activities: Payments for acquisition, net of cash acquired ( 392,240 ) ( 130,715 ) — Payments for purchase of property, plant, and equipment ( 102,910 ) ( 67,274 ) ( 24,251 ) Payments for mine development — — ( 2,277 ) Proceeds from settlement of currency exchange contract — 3,249 — Proceeds from sale of property, plant, and equipment 881 33 44 Net cash used in investing activities ( 494,269 ) ( 194,707 ) ( 26,484 ) Cash flows from financing activities: 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 ) Principal payments under finance lease obligations ( 2,819 ) ( 2,213 ) ( 1,200 ) Cash dividends paid ( 9,697 ) ( 9,257 ) ( 8,856 ) Deferred financing costs ( 7,403 ) — ( 2,130 ) Repurchase of common stock — ( 6,766 ) ( 199 ) Payments of withholding taxes for stock-based compensation awards ( 3,318 ) ( 2,221 ) ( 4,846 ) Net cash provided by (used in) financing activities 393,006 ( 7,091 ) ( 18,054 ) Effects of exchange rate changes ( 394 ) 1,612 ( 322 ) Net change in cash and cash equivalents ( 11,416 ) ( 99,129 ) 54,362 Cash and cash equivalents at beginning of period 25,878 125,007 70,645 Cash and cash equivalents at end of period $ 14,462 $ 25,878 $ 125,007 The accompanying notes are an integral part of the consolidated financial statements. 43 Materion Corporation and Subsidiaries December 31, 2021 and 2020 Consolidated Balance Sheets (Thousands) 2021 2020 Assets Current assets Cash and cash equivalents (Note A) $ 14,462 $ 25,878 Accounts receivable (Note A) 223,553 166,447 Inventories, net (Notes A and J) 361,115 250,778 Prepaid and other current assets 28,122 20,896 Total current assets 627,252 463,999 Deferred income taxes (Notes A and H) 5,431 3,134 Property, plant, and equipment (Notes A and K) 1,132,223 998,312 Less allowances for depreciation, depletion, and amortization ( 723,248 ) ( 688,626 ) Property, plant, and equipment — net 408,975 309,686 Operating lease, right-of-use asset (Note M) 63,096 62,089 Intangible assets (Notes A and N) 156,736 54,672 Other assets (Note P) 27,369 19,364 Goodwill (Notes A and N) 318,620 144,916 Total Assets $ 1,607,479 $ 1,057,860 Liabilities and Shareholders’ Equity Current liabilities Short-term debt (Note O) $ 15,359 $ 1,937 Accounts payable 86,243 55,640 Salaries and wages 37,544 18,809 Other liabilities and accrued items 53,388 40,887 Income taxes (Notes A and H) 4,205 1,898 Unearned revenue (Note D) 7,770 7,713 Total current liabilities 204,509 126,884 Other long-term liabilities 14,954 14,313 Operating lease liabilities (Note M) 57,099 56,761 Finance lease liabilities (Note M) 16,327 20,539 Retirement and post-employment benefits (Note P) 33,394 41,877 Unearned income (Notes A and L) 97,962 86,761 Long-term income taxes (Notes A and H) 1,190 2,689 Deferred income taxes (Notes A and H) 27,216 15,864 Long-term debt (Note O) 434,388 36,542 Shareholders’ equity Serial preferred stock (no par value; 5,000 authorized shares, none issued) — — Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 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) ( 40,169 ) ( 38,639 ) Other equity 4,795 3,756 Total shareholders’ equity 720,440 655,630 Total Liabilities and Shareholders’ Equity $ 1,607,479 $ 1,057,860 - The accompanying notes are an integral part of the consolidated financial statements. 44 Materion Corporation and Subsidiaries Years Ended December 31, 2021, 2020, and 2019 Consolidated Statements of Shareholders’ Equity Common Shares Shareholders' Equity (Thousands) Common Shares Common Shares Held in Treasury Common Stock Retained Earnings Common Stock In Treasury Accumulated Other Comprehensive Income (Loss) Other Equity Total Balance at December 31, 2018 20,242 6,906 $ 234,704 $ 580,706 $ ( 175,426 ) $ ( 58,234 ) $ 4,488 $ 586,238 Net income — — — 53,394 — — — 53,394 Other comprehensive income — — — — — 9,444 — 9,444 Net pension curtailments and settlements — — — — — 3,328 — 3,328 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 Payments for withholding taxes for stock-based compensation awards ( 89 ) 89 — — ( 4,846 ) — — ( 4,846 ) Repurchase of shares ( 5 ) 5 — — ( 199 ) — — ( 199 ) Directors' deferred compensation 4 ( 4 ) 94 — 1,221 — ( 1,066 ) 249 Balance at December 31, 2019 20,404 6,744 $ 249,674 $ 624,954 $ ( 186,845 ) $ ( 45,462 ) $ 3,422 $ 645,743 Net income — — — 15,462 — — — 15,462 Other comprehensive income — — — — — 6,729 — 6,729 Net pension curtailments and settlements — — — — — 94 — 94 Cash dividends declared ($ 0.455 per share) — — — ( 9,257 ) — — — ( 9,257 ) Stock-based compensation activity 117 ( 117 ) 8,867 ( 101 ) ( 3,147 ) — — 5,619 Payments for withholding taxes for stock-based compensation awards ( 39 ) 39 — — ( 2,221 ) — — ( 2,221 ) Repurchase of shares ( 158 ) 158 — — ( 6,766 ) — — ( 6,766 ) Directors’ deferred compensation 4 ( 4 ) 101 — ( 208 ) — 334 227 Balance at December 31, 2020 20,328 6,820 $ 258,642 $ 631,058 $ ( 199,187 ) $ ( 38,639 ) $ 3,756 $ 655,630 Net income — — — 72,474 — — — 72,474 Other comprehensive income — — — — — ( 1,530 ) — ( 1,530 ) 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 ) 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 accompanying notes are an integral part of the consolidated financial statements. 45 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements Note A — Significant Accounting Policies Organization: Materion Corporation (the Company) is a holding company with subsidiaries that have operations in the United States, Europe, and Asia. These operations manufacture advanced engineered materials used in a variety of end markets, including semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center. The Company has four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other. Other includes unallocated corporate costs. Refer to Note C for additional segment details. The Company distributes its products through a combination of company-owned facilities and independent distributors and agents. Business Combinations: The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred. The amounts reflected in Note B 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. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Consolidation: The Consolidated Financial Statements include the accounts of Materion Corporation and its subsidiaries. All of the Company’s subsidiaries were wholly owned as of December 31, 2021. Intercompany accounts and transactions are eliminated in consolidation. Cash Equivalents: All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Accounts Receivable: An allowance for doubtful accounts is maintained for the expected losses resulting from the inability of customers to pay amounts due. The Company considers the current market conditions and credit losses related to the Company's trade receivables based on the macroeconomic environment, geographic considerations, and other expected market trends. 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 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: 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. 46 Property, Plant, and Equipment: Property, plant, and equipment is stated on the basis of cost. Depreciation is computed principally by the straight-line method, except certain assets for which depreciation may be computed by the units-of-production method. The depreciable lives that are used in computing the annual provision for depreciation by class of asset are primarily as follows: Years Land improvements 10 to 20 Buildings 20 to 40 Leasehold improvements Life of lease Machinery and equipment 3 to 15 Furniture and fixtures 4 to 10 Automobiles and trucks 3 to 8 Research equipment 3 to 10 Computer hardware 3 to 10 Computer software 3 to 10 An asset acquired under a finance lease will be recorded at the lesser of the present value of the projected lease payments or the fair value of the asset and will be depreciated in accordance with the above schedule. Leasehold improvements will be depreciated over the life of the improvement if it is shorter than the life of the lease. Repair and maintenance costs are expensed as incurred. Mineral Resources and Mine Development: 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 the ore body. 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. In 2020, the Company expanded a mine to further develop an ore body. Since the pre-production phase ended when ore was first extracted from this mine, the Company recognized approximately $ 12.9 million of mine development costs in 2020 as a component of cost of sales. This expansion is expected to benefit future periods. 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. The Company uses beryllium pounds as the unit of accounting measure for recording amortization. To the extent that the aforementioned costs benefit an entire ore body, the costs are amortized over the estimated useful life of the ore body. 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: Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. 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 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. Finite-lived intangible assets are also reviewed for impairment if facts and circumstances warrant. 47 Long-Lived Asset Impairment: Management performs impairment tests of long-lived assets, including property and equipment, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future undiscounted cash flows generated by the asset group are less than its carrying value. If such undiscounted cash flows indicate that the carrying value of the asset group is not recoverable, impairment losses are measured by comparing the estimated fair value of the asset group to its carrying amount. Derivatives: The Company recognizes all derivatives on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income, a component of shareholders’ equity, until the hedged item is recognized in earnings. If the derivative is designated as a fair value hedge, changes in fair value are offset against the change in the fair value of the hedged asset, liability, or commitment through earnings. The ineffective portion of a derivative’s change in fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in its fair value are adjusted through the income statement. Asset Retirement Obligation: The Company records a liability to recognize the legal obligation to remove an asset at the time the asset is acquired or when the legal liability arises. The liability is recorded for the present value of the ultimate obligation by discounting the estimated future cash flows using a credit-adjusted risk-free interest rate. The liability is accreted over time, with the accretion charged to expense. An asset equal to the fair value of the liability is recorded concurrent with the liability and depreciated over the life of the underlying asset. Unearned Income: Expenditures for capital equipment to be reimbursed under government contracts are recorded in property, plant, and equipment, while the reimbursements for those expenditures are recorded in unearned income, a liability on the balance sheet. 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, 2021 and 2020, are $ 72.6 million and $ 58.8 million, respectively, of customer prepayments. See Note L for additional discussion. Advertising Costs: The Company expenses all advertising costs as incurred. Advertising costs were $ 0.3 million in 2021, $ 0.3 million in 2020, and $ 0.7 million in 2019. Stock-based Compensation: The Company recognizes stock-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. Stock-based awards include performance-based restricted stock units (PRSUs), restricted stock units (RSUs), and stock appreciation rights (SARs). The fair value of PRSUs and RSUs is primarily based on the closing market price of a share of the Company's common stock on the date of grant, modified as appropriate to take into account the features of such grants. SARs are granted with an exercise price equal to the closing price of the Company's common shares on the date of grant. 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. Capitalized Interest: Interest expense associated with active capital asset construction and mine development projects is capitalized and amortized over the future useful lives of the related assets. Income Taxes: The Company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. The Company will record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized, as warranted by current facts and circumstances. The Company applies a more-likely-than-not recognition threshold for all tax uncertainties and will record a liability for those tax benefits that have a less than 50% likelihood of being sustained upon examination by the taxing authorities. Net Income Per Share: Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive common stock equivalents as appropriate using the treasury stock method. New Pronouncements Adopted: 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- 48 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. Note B — Acquisition On November 1, 2021, the Company acquired the industry-leading electronic materials business of H.C. Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $ 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: 49 (Thousands) November 1, 2021 Assets: Cash and cash equivalents $ 3,685 Accounts receivable 28,352 Inventories 70,681 Prepaid and other current assets 660 Property, plant, and equipment 44,681 Operating lease, right-of-use assets 6,120 Intangible assets 107,800 Other long-term assets 4,528 Goodwill 178,181 Total assets acquired $ 444,688 Liabilities: Accounts payable $ 12,139 Salaries and wages 2,516 Other liabilities and accrued items 28 Income taxes 2,183 Other long-term liabilities 5,543 Operating lease liabilities 6,042 Deferred income taxes 20,300 Total liabilities assumed $ 48,751 Net assets acquired $ 395,937 Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The Company engaged specialists to assist in the valuation of inventories, property, plant, and equipment, and intangible assets. 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 analyses are performed. 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. 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). 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. The goodwill is not expected to be deductible for U.S. tax purposes. 50 The following table reports the intangible assets by asset category as of the closing date: (Thousands) Value at Acquisition Useful Life Customer relationships $ 50,200 13 years Technology 35,300 13 years Trade name 22,300 15 years Total $ 107,800 The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials 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: (Unaudited) Year Ended December 31, 2021 2020 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 The Company has the following operating segments: Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other. The Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance. The segments are determined based on several factors, including the availability of discrete financial information and the Company’s organizational and management structure. 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, 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. 51 The Other reportable segment includes unallocated corporate costs and assets. Financial information for reportable segments was as follows: (Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Other Total 2021 Net sales $ 511,874 $ 866,816 $ 131,954 $ — $ 1,510,644 Intersegment sales 172 13,880 — — 14,052 Operating profit (loss) 67,908 35,330 14,185 ( 40,312 ) 77,111 Depreciation, depletion, and amortization 21,685 9,602 10,883 1,967 44,137 Expenditures for long-lived assets 82,987 10,780 7,523 1,620 102,910 Total assets 636,182 653,595 252,711 64,991 1,607,479 2020 Net sales $ 394,195 $ 670,867 $ 111,212 $ — $ 1,176,274 Intersegment sales 6 35,912 — — 35,918 Operating profit (loss) 13,597 22,120 ( 4,382 ) ( 23,120 ) 8,215 Depreciation, depletion, and amortization 25,782 8,061 6,564 1,977 42,384 Expenditures for long-lived assets 53,841 9,003 908 3,522 67,274 Total assets 477,892 251,637 268,004 60,327 1,057,860 2019 Net sales $ 500,201 $ 573,763 $ 111,460 $ — $ 1,185,424 Intersegment sales 38 70,047 — — 70,085 Operating profit (loss) 73,815 25,124 ( 3,550 ) ( 24,843 ) 70,546 Depreciation, depletion, and amortization 24,437 8,955 5,695 2,029 41,116 Expenditures for long-lived assets 15,520 7,572 1,045 2,391 26,528 Total assets 442,885 214,961 78,981 161,603 898,430 Intersegment sales are eliminated in consolidation. 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: (Thousands) 2021 2020 2019 Total operating profit for reportable segments $ 77,111 $ 8,215 $ 70,546 Other non-operating (income) expense - net ( 5,115 ) ( 3,939 ) 3,431 Interest expense - net 4,901 3,879 1,579 Income before income taxes $ 77,325 $ 8,275 $ 65,536 52 Other geographic information includes the following: (Thousands) 2021 2020 2019 Net sales United States $ 794,862 $ 641,727 $ 743,345 Asia 426,303 329,968 256,114 Europe 270,213 189,281 169,132 All other 19,266 15,298 16,833 Total $ 1,510,644 $ 1,176,274 $ 1,185,424 Property, plant, and equipment, net by country deployed United States $ 327,969 $ 223,340 $ 194,596 All other 81,006 86,346 37,680 Total $ 408,975 $ 309,686 $ 232,276 International sales include sales from international operations and direct exports from our U.S. operations. No individual country, other than the United States, or customer accounted for 10 % or more of the Company’s net sales for the years presented. The following table disaggregates revenue for each segment by end market for 2021 and 2020: (Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Other Total 2021 End Market Semiconductor $ 8,481 $ 683,085 $ 2,572 $ — $ 694,138 Industrial 123,337 45,025 32,779 — 201,141 Aerospace and Defense 86,046 5,509 23,622 — 115,177 Consumer Electronics 41,694 1,184 32,485 — 75,363 Automotive 105,466 7,321 8,356 — 121,143 Energy 23,913 99,330 — — 123,243 Telecom and Data Center 53,510 173 — — 53,683 Other 69,427 25,189 32,140 — 126,756 Total $ 511,874 $ 866,816 $ 131,954 $ — $ 1,510,644 2020 End Market Semiconductor $ 4,626 $ 526,553 $ 456 $ — $ 531,635 Industrial 90,884 38,052 18,096 — 147,032 Aerospace and Defense 67,173 6,241 19,539 — 92,953 Consumer Electronics 47,983 479 21,566 — 70,028 Automotive 66,489 6,262 3,532 — 76,283 Energy 20,587 75,768 — — 96,355 Telecom and Data Center 44,313 2,183 — — 46,496 Other 52,140 15,329 48,023 — 115,492 Total $ 394,195 $ 670,867 $ 111,212 $ — $ 1,176,274 Note D — Revenue Recognition Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue, in an amount that reflects the consideration to which it expects to be entitled, upon satisfaction of a performance obligation by transferring control over a product to the customer. Control over the product is generally transferred to the customer when the 53 Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product. Shipping and Handling Costs : The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill its promise to transfer the associated products. Accordingly, customer payments for shipping and handling costs are recorded as a component of net sales, and related costs are recorded as a component of cost of sales. Taxes Collected from Customers and Remitted to Governmental Authorities : Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Product Warranty : Substantially all of the Company’s customer contracts contain a warranty that provides assurance that the purchased product will function as expected and in accordance with certain specifications. The warranty is intended to safeguard the customer against existing defects and does not provide any incremental service to the customer. Transaction Price Allocated to Future Performance Obligations: ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at December 31, 2021. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. After considering the practical expedient, at December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximate ly $ 81.9 million . Contract Costs : The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs primarily relate to sales commissions, which are included in selling, general, and administrative expenses. Contract Balances : The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities: (Thousands) December 31, 2021 December 31, 2020 $ change % change Accounts receivable, trade $ 213,584 $ 156,821 $ 56,763 36 % Unbilled receivables 7,961 8,832 ( 871 ) ( 10 ) % Unearned revenue 7,770 7,713 57 1 % Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred relating to our receivables were immaterial during 2021. Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables. Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately $ 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. The Company does not include extended payment terms in its contracts with customers. 54 Note E — Restructuring During 2020, the Company committed to a plan to sell its Large Area Coatings (LAC) business (a reporting unit within the Precision Optics segment) and determined that it met the criteria to be classified as held for sale. The Company recorded a goodwill impairment charge of $ 9.1 million in the first quarter of 2020 to write-off the remaining balance of goodwill for the LAC reporting unit. In addition, the Company estimated the fair value of the disposal group as a whole, less costs to sell, and compared the fair value to the remaining carrying value. Based on this review, the Company recorded an additional $ 1.4 million asset impairment loss. 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, 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. 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. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reductions. 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 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. Remaining severance payments of $ 0.5 million and facility costs of $ 0.5 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items in the Consolidated Balance Sheet as of December 31, 2020. 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. Costs associated with this plan also included severance and related costs for 19 employees, all of which was paid out by the end of 2020. In addition, in 2019, the Company completed cost reduction actions in order to align costs with commensurate business levels. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. Costs associated with these actions were in the Other segment and included severance associated with seven employees and other related costs. All severance payments were paid by the end of 2020. 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 as of December 31, 2021 are immaterial. These costs are presented in the Company's segment results as follows: (Thousands) 2021 2020 2019 Performance Alloys and Composites $ — $ 8,763 $ — Advanced Materials — — — Precision Optics ( 438 ) 2,052 328 Other — 422 457 Total $ ( 438 ) $ 11,237 $ 785 55 Note F — Other-net Other-net is summarized for 2021, 2020, and 2019 as follows: (Income) Expense (Thousands) 2021 2020 2019 Metal consignment fees $ 9,305 $ 8,587 $ 9,247 Amortization of intangible assets 5,973 2,377 1,400 Foreign currency loss (gain) 1,573 ( 2,569 ) 666 Net (gain) loss on disposal of fixed assets ( 282 ) 466 344 Rental income — — ( 87 ) Other items 168 ( 398 ) 213 Total other-net $ 16,737 $ 8,463 $ 11,783 Note G — Interest Expense-net The following chart summarizes the interest incurred, capitalized, and paid in 2021, 2020, and 2019: (Thousands) 2021 2020 2019 Interest incurred, net $ 5,277 $ 3,889 $ 1,641 Less: Capitalized interest 376 10 62 Total net expense $ 4,901 $ 3,879 $ 1,579 Interest paid $ 3,652 $ 3,442 $ 1,799 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 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 Income (loss) before income taxes: Domestic $ 54,684 $ ( 1,153 ) $ 60,271 Foreign 22,641 9,428 5,265 Total income (loss) before income taxes $ 77,325 $ 8,275 $ 65,536 Income tax expense: Current income tax expense (benefit): Domestic $ 14,603 $ 812 $ 6,995 Foreign 3,205 1,851 1,202 Total current $ 17,808 $ 2,663 $ 8,197 Deferred income tax (benefit) expense: Domestic $ ( 7,953 ) $ ( 5,641 ) $ 2,687 Foreign ( 5,004 ) ( 4,209 ) 1,258 Total deferred $ ( 12,957 ) $ ( 9,850 ) $ 3,945 Total income tax expense (benefit) $ 4,851 $ ( 7,187 ) $ 12,142 56 A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows: 2021 2020 2019 U.S. federal statutory rate 21.0 % 21.0 % 21.0 % State and local income taxes, net of federal tax effect ( 0.3 ) ( 10.0 ) 1.0 Effect of excess of percentage depletion over cost depletion ( 3.4 ) ( 43.0 ) ( 4.3 ) Foreign derived intangible income deduction ( 2.3 ) ( 1.8 ) ( 3.0 ) Non-deductible goodwill impairment — 7.1 1.1 Tax Cuts and Jobs Act impact — — 2.3 Research and development tax credit ( 1.2 ) ( 16.4 ) ( 1.1 ) Foreign tax credit — — ( 0.3 ) Impact of foreign operations 0.3 ( 5.3 ) 0.9 Non-deductible transaction costs 1.6 6.9 0.2 Interest from tax authorities — ( 3.8 ) — Adjustment to unrecognized tax benefits ( 1.9 ) 1.8 0.2 Equity compensation ( 0.5 ) ( 5.3 ) ( 3.2 ) Non-deductible officers' compensation 1.4 6.8 0.8 Valuation allowance ( 8.5 ) ( 45.5 ) 2.1 Other items 0.1 0.6 0.8 Effective tax rate 6.3 % ( 86.9 ) % 18.5 % Deferred tax assets and (liabilities) are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and (liabilities) recorded in the Consolidated Balance Sheets consist of the following: December 31, (Thousands) 2021 2020 Asset (liability) Post-employment benefits other than pensions $ 1,714 $ 1,564 Other reserves 1,901 226 Deferred compensation 3,263 3,322 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 Accrued compensation expense 6,410 2,683 Net operating loss and credit carryforwards 11,423 12,711 Subtotal 58,291 39,732 Valuation allowance ( 4,957 ) ( 14,134 ) Total deferred tax assets 53,334 25,598 Depreciation ( 24,484 ) ( 12,112 ) Lease assets ( 11,184 ) ( 10,261 ) Inventory ( 2,329 ) ( 3,532 ) Amortization ( 35,542 ) ( 10,754 ) Mine development ( 917 ) ( 1,669 ) Unrealized gains ( 663 ) — Total deferred tax liabilities ( 75,119 ) ( 38,328 ) Net deferred tax liabilities $ ( 21,785 ) $ ( 12,730 ) 57 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 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. federal jurisdiction, and in various state, local, and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal examinations for years before 2018, state and local examinations for years before 2017, and foreign examinations for tax years before 2015. We operate under a tax holiday in Malaysia, which is effective through July 31, 2022 and may be extended if certain additional requirements are satisfied. The tax holiday is conditional upon our meeting certain employment, sales, and investment thresholds. 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 Balance at January 1 $ 2,360 $ 3,221 Additions to tax provisions related to the current year 431 191 Additions to tax positions related to prior years — — Reduction to tax positions related to prior years ( 45 ) ( 349 ) Lapses on statutes of limitations ( 1,604 ) ( 703 ) Balance at December 31 $ 1,142 $ 2,360 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. Accrued interest and penalties are included on the related tax liability line in the Consolidated Balance Sheets. The amount of interest and penalties, net of the related tax benefit, recognized in earnings was immaterial during 2021, 2020, and 2019. As of December 31, 2021 and 2020, accrued interest and penalties, net of the related tax benefit, were immaterial. Income taxes paid during 2021, 2020, and 2019, were approximately $ 21.8 million, $ 3.9 million, and $ 9.3 million, respectively. 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 $ 102.3 million as of 58 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. Note I — Earnings Per Share The following table sets forth the computation of basic and diluted EPS: (Thousands except per share amounts) 2021 2020 2019 Numerator for basic and diluted EPS: Net income $ 72,474 $ 15,462 $ 53,394 Denominator: Denominator for basic EPS: Weighted-average shares outstanding 20,422 20,338 20,365 Effect of dilutive securities: Stock appreciation rights 78 39 72 Restricted stock units 124 102 75 Performance-based restricted stock units 65 124 143 Diluted potential common shares 267 265 290 Denominator for diluted EPS: Adjusted weighted-average shares outstanding 20,689 20,603 20,655 Basic EPS $ 3.55 $ 0.76 $ 2.62 Diluted EPS $ 3.50 $ 0.75 $ 2.59 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 in the Consolidated Balance Sheets are summarized as follows: December 31, (Thousands) 2021 2020 Raw materials and supplies $ 93,518 $ 42,905 Work in process 221,638 156,093 Finished goods 45,959 51,780 Inventories, net 361,115 250,778 The Company takes and records the results of a physical inventory count of its precious metals on a quarterly basis. The Company's precious metal operations include a refinery that processes precious metal-containing scrap and other materials from its customers, as well as its own internally generated scrap. The Company also outsources portions of its refining requirements to other vendors, particularly those materials with longer processing times. The precious metal content within these various refine streams may be in solutions, sludges, and other non-homogeneous forms and can vary over time based upon the input materials, yield rates, and other process parameters. The determination of the weight of the precious metal content within the refine streams as part of a physical inventory count requires the use of estimates and calculations based upon assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volumes of solutions and other materials within the refinery, data from the Company's refine vendors, and other factors. The resulting calculated weight of the precious metals in the Company's refine operations may differ, in either direction, from what its records indicate that the Company should have on hand, which would then result in an adjustment to its pre-tax income in the period when the physical inventory was taken, and the related estimates were made. The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was $ 480.2 million as of December 31, 2021 versus $ 400.0 million as of December 31, 2020. 59 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 Property, plant, and equipment on the Consolidated Balance Sheets is summarized as follows: December 31, (Thousands) 2021 2020 Land $ 26,627 $ 5,686 Buildings 173,907 165,144 Machinery and equipment 687,502 645,195 Software 45,445 43,652 Construction in progress 130,838 69,297 Allowances for depreciation ( 690,166 ) ( 662,724 ) Subtotal 374,153 266,250 Finance leases 32,865 34,301 Allowances for depreciation ( 6,193 ) ( 4,914 ) Subtotal 26,672 29,387 Mineral resources 4,980 4,979 Mine development 30,059 30,058 Allowances for amortization and depletion ( 26,889 ) ( 20,988 ) Subtotal 8,150 14,049 Property, plant, and equipment — net $ 408,975 $ 309,686 The Company received $ 63.5 million from the U.S. Department of Defense (DoD), in previous periods, for reimbursement of the DoD's share of the cost of equipment. This amount was recorded in property, plant, and equipment and the reimbursements are reflected in Unearned income on the Consolidated Balance Sheets. The equipment was placed in service during 2012, and its full cost is being depreciated in accordance with Company policy. The unearned income liability is being reduced ratably with the depreciation expense recorded over the life of the equipment. 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 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. Depreciation expense related to software was $ 1.8 million , $ 1.8 million, and $ 2.4 million in 2021 , 2020 , and 2019, respectively. Note L — Customer Prepayments The Company entered into investment and master supply agreements with a customer to procure equipment to manufacture product for the customer. The customer 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 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. 60 Note M — Leasing Arrangements The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years. Several operating lease agreements contain options to extend the lease term and/or options for early termination. The lease term consists of the non-cancelable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. As of December 31, 2021 , we had no material leases that had yet to commence. 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 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: (Thousands) 2021 2020 Components of lease expense Operating lease cost $ 11,825 $ 10,602 Finance lease cost Amortization of right-of-use assets 1,989 1,324 Interest on lease liabilities 1,009 1,021 Total lease cost $ 14,823 $ 12,947 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, 2021 and 2020 is as follows: (Thousands, except lease term and discount rate) 2021 2020 Supplemental balance sheet information Operating Leases Operating lease right-of-use assets $ 63,096 $ 62,089 Other liabilities and accrued items 7,906 6,908 Operating lease liabilities 57,099 56,761 Finance Leases Property, plant, and equipment $ 32,865 $ 34,301 Allowances for depreciation, depletion, and amortization ( 6,193 ) ( 4,914 ) Finance lease assets, net $ 26,672 $ 29,387 Other liabilities and accrued items $ 2,800 $ 2,925 Finance lease liabilities 16,327 20,539 Total principal payable on finance leases $ 19,127 $ 23,464 Weighted Average Remaining Lease Term Operating leases 11.47 12.72 Finance leases 16.96 16.59 Weighted Average Discount Rate Operating leases 6.19 % 6.46 % Finance leases 4.99 % 4.88 % 61 Future maturities of the Company's lease liabilities as of December 31, 2021 are as follows: Finance Operating (Thousands) Leases Leases 2022 $ 3,644 $ 11,551 2023 2,384 10,970 2024 1,466 8,785 2025 1,311 7,909 2026 1,285 6,500 2027 and thereafter 18,980 47,129 Total lease payments 29,070 92,844 Less amount of lease payment representing interest 9,943 27,839 Total present value of lease payments $ 19,127 $ 65,005 Supplemental cash flow information related to leases was as follows: (Thousands) 2021 2020 Supplemental cash flow information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 17,580 $ 16,216 Operating cash flows from finance leases 1,009 1,021 Financing cash flows from finance leases 2,819 2,213 Right-of-use assets obtained in exchange for lease obligations: Operating leases 9,191 43,037 Finance leases — 6,736 Note N — Intangible Assets and Goodwill Intangible Assets The cost and accumulated amortization of intangible assets subject to amortization as of December 31, 2021 and 2020, is as follows: 2021 2020 (Thousands) Gross Carrying Amount Accumulated Amortization Net Gross Carrying Amount Accumulated Amortization Net Customer relationships $ 111,220 $ ( 22,777 ) $ 88,443 $ 81,231 $ ( 38,773 ) $ 42,458 Technology 45,614 ( 7,517 ) 38,097 16,915 ( 13,290 ) 3,625 Licenses and other 33,868 ( 7,279 ) 26,589 11,457 ( 4,840 ) 6,617 Total $ 190,702 $ ( 37,573 ) $ 153,129 $ 109,603 $ ( 56,903 ) $ 52,700 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. 62 Amortization expense for 2021, 2020, and 2019 was $ 6.0 million, $ 2.4 million, and $ 1.4 million, respectively. Estimated amortization e xpense for each of the five succeeding years is as follows: Amortization (Thousands) Expense 2022 13,159 2023 12,520 2024 12,427 2025 11,794 2026 10,515 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. Goodwill 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. A summary of changes in goodwill by reportable segment is as follows: (Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Total Balance at December 31, 2019 $ 1,899 $ 50,190 $ 26,922 $ 79,011 Acquisition — — 70,577 70,577 Impairment charge — — ( 9,053 ) ( 9,053 ) Other — 337 4,044 4,381 Balance at December 31, 2020 $ 1,899 $ 50,527 $ 92,490 $ 144,916 Acquisition 23,904 154,277 — 178,181 Impairment charge — — — — Other — ( 284 ) ( 4,193 ) ( 4,477 ) 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. The results of the Company's 2021 , 2020 , and 2019 annual goodwill impairment assessments indicated that no other goodwill impairment existed. 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. 63 Note O — Debt Long-term debt in the Consolidated Balance Sheets is summarized as follows: December 31, (Thousands) 2021 2020 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 Fixed rate industrial development revenue bonds — 1,322 Total long-term debt outstanding 454,548 38,479 Current portion of long-term debt ( 15,359 ) ( 1,937 ) Gross long-term debt $ 439,189 $ 36,542 Unamortized deferred financing fees ( 4,801 ) — Long-term debt $ 434,388 $ 36,542 Maturities on long-term debt instruments as of December 31, 2021 are as follows: (Thousands) 2022 $ 15,359 2023 15,359 2024 30,359 2025 30,359 2026 362,620 2027 and thereafter 492 Total $ 454,548 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 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 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. 64 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, England, and the U.S. supplemental retirement plans. The Other Benefits column includes the domestic retiree medical and life insurance plan. Pension Benefits Other Benefits (Thousands) 2021 2020 2021 2020 Change in benefit obligation Benefit obligation at beginning of year $ 246,107 $ 186,760 $ 8,190 $ 8,681 Service cost 1,722 1,403 80 59 Interest cost 4,186 5,234 116 213 Net pension curtailments and settlements — ( 609 ) — — Acquisition — 30,360 — — Plan amendments — ( 799 ) — — Actuarial (gain) loss ( 8,448 ) 24,259 ( 112 ) 224 Benefit payments ( 4,927 ) ( 4,612 ) ( 742 ) ( 989 ) Foreign currency exchange rate changes and other ( 2,861 ) 4,111 ( 18 ) 2 Benefit obligation at end of year 235,779 246,107 7,514 8,190 Change in plan assets Fair value of plan assets at beginning of year 226,176 174,046 — — Plan settlements — — — — Acquisition — 23,774 — — Actual return on plan assets 6,082 30,330 — — Employer contributions 955 614 — — Employee contributions 878 498 — — Benefit payments from fund ( 5,399 ) ( 4,720 ) — — Expenses paid from assets ( 313 ) ( 234 ) — — Foreign currency exchange rate changes and other ( 1,039 ) 1,868 — — Fair value of plan assets at end of year 227,340 226,176 — — Funded status at end of year $ ( 8,439 ) $ ( 19,931 ) $ ( 7,514 ) $ ( 8,190 ) Amounts recognized in the Consolidated Balance Sheets consist of: Other assets $ 18,566 $ 13,074 $ — $ — Other liabilities and accrued items ( 1,662 ) ( 470 ) ( 754 ) ( 866 ) Retirement and post-employment benefits ( 25,343 ) ( 32,535 ) ( 6,760 ) ( 7,324 ) Net amount recognized $ ( 8,439 ) $ ( 19,931 ) $ ( 7,514 ) $ ( 8,190 ) 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. defined benefit pension plan. The Company froze the pay and service amounts used to calculate the pension benefits for active participants as of January 1, 2020. The Company recognized a non-cash pretax pension curtailment charge of $ 3.3 million associated with the plan amendment in 2019. The following amounts are included within accumulated other comprehensive loss at December 31, 2021 : Pension Benefits Other Benefits (Thousands) 2021 2020 2021 2020 Amounts recognized in other comprehensive income (before tax) consist of: Net actuarial loss (gain) $ 42,440 $ 49,472 $ ( 4,044 ) $ ( 3,973 ) 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 ) 65 The following table provides information regarding the accumulated benefit obligation: Pension Benefits Other Benefits (Thousands) 2021 2020 2021 2020 Additional information Accumulated benefit obligation for all defined benefit pension plans $ 233,717 $ 243,953 $ — $ — For defined benefit pension plans with benefit obligations in excess of plan assets: Aggregate benefit obligation 58,052 62,012 — — Aggregate fair value of plan assets 33,148 29,938 — — For defined benefit pension plans with accumulated benefit obligations in excess of plan assets: Aggregate accumulated benefit obligation 56,043 59,858 — — Aggregate fair value of plan assets 33,148 29,938 — — The following table summarizes components of net benefit cost: Pension Benefits Other Benefits (Thousands) 2021 2020 2019 2021 2020 2019 Net benefit cost Service cost $ 1,722 $ 1,403 $ 5,918 $ 80 $ 59 $ 67 Interest cost 4,186 5,234 6,292 116 213 399 Expected return on plan assets ( 9,881 ) ( 9,333 ) ( 8,777 ) — — — Amortization of prior service credit ( 82 ) — 483 ( 1,497 ) ( 1,497 ) ( 1,497 ) Recognized net actuarial loss (gain) 2,344 1,678 3,304 ( 275 ) ( 332 ) ( 93 ) Net periodic benefit (credit) cost ( 1,711 ) ( 1,018 ) 7,220 ( 1,576 ) ( 1,557 ) ( 1,124 ) Net pension curtailments and settlements — 94 3,328 — — — Total net benefit (credit) cost $ ( 1,711 ) $ ( 924 ) $ 10,548 $ ( 1,576 ) $ ( 1,557 ) $ ( 1,124 ) In 2019, net benefit cost includes a $ 3.3 million curtailment charge related to the freeze of our U.S. defined benefit plan effective January 1, 2020. Components of net periodic benefit cost, other than service cost, are included in Other non-operating (income) expense in the Consolidated Statements of Income. Additionally, Pension Benefit Guaranty Corporation premiums are reported within expected return on plan assets. 66 The following table summarizes amounts recognized in other comprehensive income (OCI): Pension Benefits Other Benefits (Thousands) 2021 2020 2019 2021 2020 2019 Change in other comprehensive income OCI at beginning of year $ 48,673 $ 48,073 $ 65,409 $ ( 7,525 ) $ ( 9,578 ) $ ( 8,976 ) Increase (decrease) in OCI: Recognized during year — prior service cost (credit) 82 — ( 3,811 ) 1,497 1,497 1,497 Recognized during year — net actuarial (losses) gains ( 2,344 ) ( 1,678 ) ( 3,304 ) 275 332 93 Occurring during year — prior service cost — ( 799 ) — — — — Occurring during year — net actuarial losses (gains) ( 4,553 ) 3,146 2,062 ( 345 ) 224 ( 2,192 ) Other adjustments — ( 94 ) ( 12,212 ) — — — Foreign currency exchange rate changes 524 25 ( 71 ) — — — OCI at end of year $ 42,382 $ 48,673 $ 48,073 $ ( 6,098 ) $ ( 7,525 ) $ ( 9,578 ) In determining the projected benefit obligation and the net benefit cost, as of a December 31 measurement date, the Company used the following weighted-average assumptions: Pension Benefits Other Benefits 2021 2020 2019 2021 2020 2019 Weighted-average assumptions used to determine benefit obligations at fiscal year end Discount rate 2.42 % 2.14 % 3.12 % 2.90 % 2.45 % 3.20 % Rate of compensation increase 2.19 % 2.22 % 3.00 % 3.00 % 3.00 % 3.00 % Weighted-average assumptions used to determine net cost for the fiscal year Discount rate 4.69 % 8.37 % 4.16 % 2.45 % 3.20 % 4.11 % Expected long-term return on plan assets 5.44 % 5.70 % 6.06 % N/A N/A N/A Rate of compensation increase 2.87 % 2.87 % 2.99 % 3.00 % 3.00 % 4.00 % Discount Rate. The discount rate used to determine the present value of the projected and accumulated benefit obligation at the end of each year is established based upon the available market rates for high quality, fixed income investments whose maturities match the plan’s projected cash flows. The Company uses a spot-rate approach to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation. Expected Long-Term Return on Plan Assets. Management establishes the domestic expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation and risk management objectives. Consideration is given to both recent plan asset performance as well as plan asset performance over various long-term periods of time, with an emphasis on the assumption being a prospective, long-term rate of return. Management consults with and considers the opinions of its outside investment advisers and actuaries when establishing the rate and reviews assumptions with the Audit Committee of the Board of Directors. Rate of Compensation Increase. 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. 67 Assumptions for the defined benefit pension plans in Germany, Liechtenstein, and England are determined separately from the U.S. plan assumptions, based on historical trends and current and projected market conditions in each respective country. One plan in Germany is unfunded. Assumed health care trend rates at fiscal year end 2021 2020 Health care trend rate assumed for next year 6.00 % 6.00 % Rate that the trend rate gradually declines to (ultimate trend rate) 5.00 % 5.00 % Year that the rate reaches the ultimate trend rate 2028 2025 Plan Assets The following tables present the fair values of the Company’s defined benefit pension plan assets as of December 31, 2021 and 2020 by asset category. The Company has some investments that are valued using net asset value (NAV) as the practical expedient and have not been classified in the fair value hierarchy. Refer to Note S for definitions of the fair value hierarchy. December 31, 2021 (Thousands) Total Level 1 Level 2 Level 3 Cash $ 4,777 $ 4,777 $ — $ — Equity securities (a) 49,618 49,618 — — Fixed-income securities (b) 14,344 14,344 — — Other types of investments: Real estate fund (c) 3,258 3,258 — — Total 71,997 71,997 — — Investments measured at NAV: (d) Pooled investment fund (e) 147,832 Multi-strategy hedge funds (f) 7,438 Private equity funds 73 Total assets at fair value $ 227,340 December 31, 2020 (Thousands) Total Level 1 Level 2 Level 3 Cash $ 2,204 $ 2,204 $ — $ — Equity securities (a) 49,293 49,293 — — Fixed-income securities (b) 20,375 20,375 — — Other types of investments: Real estate fund (c) 6,105 6,105 — — Total 77,977 77,977 — — Investments measured at NAV: (d) Pooled investment fund (e) 143,503 Multi-strategy hedge funds (f) 4,624 Private equity funds 72 Total assets at fair value $ 226,176 (a) Equity securities are primarily comprised of corporate stock and mutual funds directly held by the plans. Equity securities are valued using the closing price reported on the active market on which the individual securities are traded. (b) Fixed income securities are primarily comprised of governmental and corporate bonds directly held by the plans. Governmental and corporate bonds are valued using both market observable inputs for similar assets that are traded on an active market and the closing price on the active market on which the individual securities are traded. (c) Includes a mutual fund that typically invests at least 80 % of its assets in equity and debt securities of companies in the real estate industry or related industries or in companies which own significant real estate assets at the time of investment. (d) Certain assets that are measured at fair value using the NAV practical expedient have not been classified in the fair value hierarchy. (e) Pooled investment fund consists of various investment types including equity investments covering a range of geographies and including investment managers that hold long and short positions, property investments, and other 68 multi-strategy funds which combine a range of different credit, equity, and macro-orientated ideas and dynamically allocate funds across asset classes. (f) Includes a fund that invests in a broad portfolio of hedge funds. The Company’s domestic defined benefit pension plan investment strategy, as approved by the Governance and Organization Committee of the Board of Directors, is to employ an allocation of investments that will generate returns equal to or better than the projected long-term growth of pension liabilities so that the plan will be self-funding. The return objective is to maximize investment return to achieve and maintain a 100 % funded status over time, taking into consideration required cash contributions. The allocation of investments is designed to maximize the advantages of diversification while mitigating the risk and overall portfolio volatility to achieve the return objective. Risk is defined as the annual variability in value and is measured in terms of the standard deviation of investment return. Under the Company’s investment policies, allowable investments include domestic equities, international equities, fixed income securities, cash equivalents, and alternative securities (which include real estate, private venture capital investments, hedge funds, and tactical asset allocation). Ranges, in terms of a percentage of the total assets, are established for each allowable class of security. Derivatives may be used to hedge an existing security or as a risk reduction strategy. Current asset allocation guidelines are to invest 10 % to 40 % in equity securities, 60 % to 90 % in fixed income securities and cash, and up to 20 % in alternative securities. Management reviews the asset allocation on a quarterly or more frequent basis and makes revisions as deemed necessary. None of the plan assets noted above are invested in the Company’s common stock. Cash Flows Employer Contributions. The Company does not expect to contribute to its domestic defined benefit pension plan in 2022. All plan participants with an accrued benefit may elect an immediate payout in lieu of their future monthly annuity if the lump sum amount does not exceed $ 100,000 . Estimated Future Benefit Payments. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Other Benefits (Thousands) Pension Benefits Gross Benefit Payment Net of Medicare Part D Subsidy 2022 6,286 756 756 2023 7,713 708 708 2024 8,778 634 634 2025 8,932 567 567 2026 9,768 504 504 2027 through 2031 54,751 1,925 1,925 Other Benefit Plans 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 $ 1.1 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. employees. The Company’s annual defined contribution expense, including the expense for the enhanced defined contribution plan, was $ 9.9 million in 2021, $ 9.8 million in 2020, and $ 7.0 million in 2019. 69 Note Q — Accumulated Other Comprehensive (Loss) Income Changes in the components of accumulated other comprehensive (loss) income, including amounts reclassified out, for 2021, 2020, and 2019, and the balances in accumulated other comprehensive (loss) income as of December 31, 2021, 2020, and 2019 are as follows: Gains and Losses On Cash Flow Hedges Pension and Post- Employment Benefits Foreign Currency Translation (Thousands) Foreign Currency Precious Metals Copper Total Total Balance at December 31, 2018 $ 1,263 $ 79 $ ( 441 ) $ 901 $ ( 54,543 ) $ ( 4,592 ) $ ( 58,234 ) Other comprehensive income (loss) before reclassifications 108 ( 1,285 ) 209 ( 968 ) 9,085 ( 421 ) 7,696 Amounts reclassified from accumulated other comprehensive income ( 29 ) 595 393 959 8,853 — 9,812 Other comprehensive income (loss) before tax 79 ( 690 ) 602 ( 9 ) 17,938 ( 421 ) 17,508 Deferred taxes on current period activity 18 ( 159 ) 136 ( 5 ) 4,741 — 4,736 Other comprehensive income (loss) after tax 61 ( 531 ) 466 ( 4 ) 13,197 ( 421 ) 12,772 Balance at December 31, 2019 $ 1,324 $ ( 452 ) $ 25 $ 897 $ ( 41,346 ) $ ( 5,013 ) $ ( 45,462 ) Balance at December 31, 2019 $ 1,324 $ ( 452 ) $ 25 $ 897 $ ( 41,346 ) $ ( 5,013 ) $ ( 45,462 ) Other comprehensive income (loss) before reclassifications ( 1,268 ) ( 1,675 ) 218 ( 2,725 ) ( 2,721 ) 9,030 3,584 Amounts reclassified from accumulated other comprehensive income 222 2,041 354 2,617 ( 57 ) — 2,560 Other comprehensive income (loss) before tax ( 1,046 ) 366 572 ( 108 ) ( 2,778 ) 9,030 6,144 Deferred taxes on current period activity ( 241 ) 84 129 ( 28 ) ( 651 ) — ( 679 ) Other comprehensive income (loss) after tax ( 805 ) 282 443 ( 80 ) ( 2,127 ) 9,030 6,823 Balance at December 31, 2020 $ 519 $ ( 170 ) $ 468 $ 817 $ ( 43,473 ) $ 4,017 $ ( 38,639 ) Balance at December 31, 2020 $ 519 $ ( 170 ) $ 468 $ 817 $ ( 43,473 ) $ 4,017 $ ( 38,639 ) Other comprehensive income (loss) before reclassifications 2,252 508 2,444 5,204 4,428 ( 6,904 ) 2,728 Amounts reclassified from accumulated other comprehensive income 123 ( 193 ) ( 3,049 ) ( 3,119 ) 437 — ( 2,682 ) Other comprehensive income (loss) before tax 2,375 315 ( 605 ) 2,085 4,865 ( 6,904 ) 46 Deferred taxes on current period activity 546 73 ( 137 ) 482 1,094 — 1,576 Other comprehensive income (loss) after tax 1,829 242 ( 468 ) 1,603 3,771 ( 6,904 ) ( 1,530 ) Balance at December 31, 2021 $ 2,348 $ 72 $ — $ 2,420 $ ( 39,702 ) $ ( 2,887 ) $ ( 40,169 ) 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. Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note P for additional details on pension and other post-employment expenses. 70 Note R — Stock-based Compensation 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). 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. The Company derives a tax deduction measured by the excess of the market value over the grant price at the date stock-based awards vest or are exercised. The Company recognized $ 0.9 million, $ 0.5 million, and $ 2.1 million of tax benefits in 2021, 2020, and 2019, respectively, relating to the issuance of common stock for the exercise/vesting of equity awards. The following sections provide information on awards settled in shares. SARs. The Company grants SARs to certain employees. Upon exercise of vested SARs, the participant will receive a number of shares of common stock equal to the spread (the difference between the market price of the Company’s common shares at the time of exercise and the strike price established on the grant date) divided by the common share price. The strike price of the SARs is equal to the market value of the Company’s common shares on the day of the grant. The number of SARs available to be issued is established by plans approved by the shareholders. The vesting period and the life of the SARs are established at the time of grant. The exercise of the SARs is generally satisfied by the issuance of treasury shares. SARs vest in equal installments annually over three years . SARs expire in seven years . The following table summarizes the Company's SARs activity during 2021: (Shares in thousands) Number of SARs Weighted- average Exercise Price Per Share Aggregate Intrinsic Value (thousands) Weighted- average Remaining Term (Years) Outstanding at December 31, 2020 254 $ 46.18 Granted 53 68.82 Exercised ( 44 ) 41.02 Cancelled ( 3 ) 54.61 Outstanding at December 31, 2021 260 51.55 $ 10,487 4.0 Vested and expected to vest as of December 31, 2021 260 51.55 10,487 4.0 Exercisable at December 31, 2021 160 45.41 7,277 3.1 A summary of the status and changes of shares subject to SARs and the related average price per share follows: (Shares in thousands) Number of SARs Weighted- average Grant Date Fair Value Nonvested as of December 31, 2020 106 $ 15.46 Granted 53 20.66 Vested ( 55 ) 15.80 Cancelled ( 4 ) 16.53 Nonvested as of December 31, 2021 100 $ 17.97 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 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 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. 71 The fair value of the SARs was estimated on the grant date using the Black-Scholes pricing model with the following assumptions: 2021 2020 2019 Risk-free interest rate 0.57 % 1.41 % 2.47 % Dividend yield 0.7 % 0.9 % 0.7 % Volatility 37.6 % 31.8 % 31.7 % Expected lives (in years) 4.6 4.8 5.2 The risk-free rate of return was based on U.S. Treasury yields with a maturity equal to the expected life of the award. The dividend yield was based on the Company's historical dividend rate and stock price. The expected volatility of stock was derived by referring to changes in the Company's historical common stock prices over a time-frame similar to the expected life of the award. In addition to considering the vesting period and contractual term of the award for the expected life assumption, the Company analyzes actual historical exercise experience for previously granted awards. Restricted Stock Units (RSUs) - Employees. The Company may grant RSUs to employees of the Company. These units constitute an agreement to deliver shares of common stock to the participant at the end of the vesting period, which is defined at the date of the grant, and are forfeited should the holder’s employment terminate during the restriction period. The fair market value of the RSUs is determined on the date of the grant and is amortized over the vesting period. 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 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. Cash-settled RSUs are accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stock over the vesting period of three years . Stock-based compensation expense relating to stock-settled RSUs was $ 3.5 million in 2021, $ 2.7 million in 2020, and $ 2.2 million in 2019. 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 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: (Shares in thousands) Number of Shares Weighted- average Grant Date Fair Value Outstanding at December 31, 2020 161 $ 53.50 Granted 59 68.62 Vested ( 40 ) 51.14 Forfeited ( 18 ) 56.85 Outstanding at December 31, 2021 162 $ 59.23 RSUs - Non-Employee Directors. 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 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 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. All grants will be settled in Materion common shares and are equity classified. Vesting of performance-based awards is contingent upon the attainment of threshold performance objectives. 72 The following table summarizes the activity related to performance-based RSUs during 2021: (Shares in thousands) Number of Shares Weighted- average Grant Date Fair Value Outstanding at December 31, 2020 126 $ 63.61 Granted 41 83.78 Vested ( 43 ) 50.35 Forfeited ( 5 ) 69.00 Outstanding at December 31, 2021 119 $ 70.77 Compensation expense is based upon the performance projections for the plan period of three years , the percentage of requisite service rendered, and the fair market value of the Company’s common shares on the date of grant. The offset to the compensation expense for the portion of the award to be settled in shares is recorded within shareholders’ equity and was $ 2.2 million for 2021, $ 2.0 million for 2020, and $ 3.3 million for 2019. Directors' Deferred Compensation. Non-employee directors may defer all or part of their compensation into the Company’s common stock. The fair value of the deferred shares is determined at the share acquisition date and is recorded within shareholders’ equity. At December 31, 2021, shareholders’ equity included 0.1 million shares related to this plan. Note S — Fair Value Information and Derivative Financial Instruments The Company measures and records financial instruments at fair value. A hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based upon market data (observable inputs) and the Company's assumptions (unobservable inputs). The hierarchy consists of three levels: Level 1 — Quoted market prices in active markets for identical assets and liabilities; Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use. 73 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 (Thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Other Significant Unobservable Inputs (Level 3) December 31, 2021 Financial Assets Deferred compensation investments $ 4,426 $ 4,426 $ — $ — Foreign currency forward contracts 3,368 — 3,368 — Precious metal swaps 116 — 116 — Copper swaps — — — — Total $ 7,910 $ 4,426 $ 3,484 $ — Financial Liabilities Deferred compensation liability $ 4,426 $ 4,426 $ — $ — Foreign currency forward contracts 136 — 136 — Precious metal swaps 24 — 24 — Copper swaps — — — — Total $ 4,586 $ 4,426 $ 160 $ — December 31, 2020 Financial Assets Deferred compensation investments $ 3,802 $ 3,802 $ — $ — Foreign currency forward contracts 107 — 107 — Precious metal swaps 127 — 127 — Copper swaps 632 — 632 — Total $ 4,668 $ 3,802 $ 866 $ — Financial Liabilities Deferred compensation liability $ 3,802 $ 3,802 $ — $ — Foreign currency forward contracts 1,203 — 1,203 — Precious metal swaps 349 — 349 — Copper swaps 27 — 27 — Total $ 5,381 $ 3,802 $ 1,579 $ — The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values at December 31, 2021 and 2020. The Company uses derivative contracts to hedge portions of its foreign currency exposures and may also use derivatives to hedge a portion of its precious metal exposures. The objectives and strategies for using derivatives in these areas are as follows: Foreign Currency. The Company sells a portion of its products to overseas customers in their local currencies, primarily in euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar. 74 The use of forward contracts locks in a firm rate and eliminates any downside risk from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk. Precious Metals. The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact 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. In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced. The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine. The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned. Copper. The Company also uses copper in its production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period. To mitigate this impact, the Company hedges a portion of this pricing risk. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and instruments to use to hedge exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements. The use of derivatives is governed by policies adopted by the Audit and Risk Committee of the Board of Directors. The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure. All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in OCI until the hedged item is recognized in earnings. The ineffective portion of a derivative’s fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates. 75 The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of December 31, 2021 and 2020: December 31, 2021 December 31, 2020 (Thousands) Notional Amount Fair Value Notional Amount Fair Value Foreign currency forward contracts Prepaid expenses $ 55,063 $ 2,132 $ 62,012 $ 107 Other liabilities and accrued items 9,425 128 7,695 55 These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. 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: December 31, 2021 December 31, 2020 (Thousands) Notional Amount Fair Value Notional Amount Fair Value Prepaid expenses Foreign currency forward contracts - yen $ 3,764 $ 131 $ — $ — Foreign currency forward contracts - euro 27,269 1,102 — — Precious metal swaps 4,096 116 2,155 127 Copper swaps — — 6,225 632 35,129 1,349 8,380 759 Other assets Foreign currency forward contracts - yen 143 2 — — Other liabilities and accrued items Foreign currency forward contracts - yen — — 2,668 59 Foreign currency forward contracts - euro — — 17,611 1,089 Precious metal swaps 2,160 24 4,964 349 Copper swaps — — 2,445 27 2,160 24 27,688 1,524 Other long-term liabilities Foreign currency forward contracts - euro 1,143 8 — — Total $ 38,575 $ 1,319 $ 36,068 $ ( 765 ) All of these contracts were designated and effective as cash flow hedges. No ineffectiveness expense was recorded in 2021, 2020, or 2019. 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. 76 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: (Thousands) 2021 2020 Hedging relationship Line item Foreign currency forward contracts Net sales $ 123 $ 222 Precious metal swaps Cost of sales ( 193 ) 2,041 Copper swaps Cost of sales ( 3,049 ) 354 Total $ ( 3,119 ) $ 2,617 The derivative activity in the table above is reflected in cash flows from operating activities. Note T — Contingencies and Commitments Beryllium Cases The Company is a defendant from time to time in proceedings in various state and federal courts brought by plaintiffs alleging that they have contracted, or have been placed at risk of contracting, beryllium sensitization or Chronic Beryllium Disease (CBD) or related ailments as a result of exposure to beryllium. Plaintiffs in beryllium cases seek recovery under theories of negligence and various other legal theories and seek compensatory and punitive damages, in many cases of an unspecified sum. Spouses, if any, often claim loss of consortium. Employee cases, in which plaintiffs have a high burden of proof, have historically involved relatively small losses to the Company. Third-party plaintiffs (typically employees of customers) face a lower burden of proof than do the Company’s employees, but these cases have generally been covered by varying levels of insurance. Management has vigorously contested the beryllium cases brought against the Company. Non-employee beryllium cases are covered by insurance, subject to certain limitations. The insurance covers defense costs and indemnity payments (resulting from settlements or court verdicts) and is subject to various levels of deductibles. Defense and indemnity costs were less than or equal to the deductible in both 2021 and 2020. 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. Although it is not possible to predict the outcome of any pending litigation, the Company provides for costs related to litigation matters when a loss is probable, and the amount is reasonably estimable. Litigation is subject to many uncertainties, and it is possible that some of the actions could be decided unfavorably in amounts exceeding the Company’s reserves. An unfavorable outcome or settlement of a beryllium case or adverse media coverage could encourage the commencement of additional similar litigation. The Company is unable to estimate its potential exposure to unasserted claims. 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. Environmental Proceedings The Company has an active program for environmental compliance that includes the identification of environmental projects and estimating the impact on the Company’s financial performance and available resources. Environmental expenditures that relate to current operations, such as wastewater treatment and control of airborne emissions, are either expensed or capitalized as appropriate. The Company records reserves for the probable costs for identified environmental remediation projects. 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. 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. The accruals may also be affected by rulings and negotiations with regulatory agencies. The timing of payments often lags the accrual, as environmental projects typically require a number of years to complete. 77 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. 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 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: (Thousands) 2021 2020 Reserve balance at beginning of year $ 5,476 $ 5,937 Expensed 185 288 Paid ( 891 ) ( 749 ) Reserve balance at end of year $ 4,770 $ 5,476 Ending balance recorded in: Other liabilities and accrued items $ 539 $ 845 Other long-term liabilities 4,231 4,631 The majority of expenses in both 2021 and 2020 was for various remediation projects at the Elmore, Ohio plant site. Asset Retirement Obligations The Company has asset retirement obligations related to its mine in Utah, as well as for certain leased facilities where the Company is contractually obligated to restore the facility back to its original condition at the end of the lease. The following represents a roll forward of the Company's asset retirement obligation liabilities for the years ended December 31, 2021 and 2020: (Thousands) 2021 2020 Asset retirement obligation at beginning of period $ 1,765 $ 1,421 Accretion expense 134 137 Change in liability 332 207 Asset retirement obligation at end of period $ 2,231 $ 1,765 These obligations are reflected in Other long-term liabilities on the Consolidated Balance Sheet. Other The Company is subject to various legal or other proceedings that relate to the ordinary course of its business. The Company believes that the resolution of these proceedings, individually or in the aggregate, will not have a material adverse impact upon the Company’s consolidated financial statements. On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al. , case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges 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. 78 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.